1035 Exchange Rollover Options for Your Annuity Portfolio
By Periodically, it is wise to review your life insurance and annuity policies to determine whether it would make sense to update or convert to a newer policy. Over the years, most insurance companies either introduce new policies or make enhancements to existing versions. A new policy might offer you more for your money in addition to coverage not currently available on an existing policy.
Do you currently have an annuity contract? Did you obtain the annuity policy many years ago? Have you ever heard about the idea of exchanging it for a newer annuity contract?
In case you are not aware, there is a provision in the federal tax code that permits you to “trade up” or exchange one policy for another. This is known as a 1035 exchange. The number 1035 refers to the provision under Internal Revenue Code Section 1035 that allows you to transfer the accumulated funds in one annuity to another annuity tax free. This may present you with an opportunity to convert an older, outdated annuity contract with a newer one that is more in line with your current needs and objectives. A properly executed 1035 exchange will enable you to continue to receive tax-deferred treatment until you take your money out of the annuity.
Before you execute an exchange transferring the funds from one annuity contract to another, it is extremely important for you know and understand the rules.
First, according to the tax code, you must exchange an old annuity contract for a new annuity contract.
Second, to qualify as a tax-free exchange, the tax code says that you must exchange 1) one annuity for another annuity or 2) a life insurance policy for a life insurance contract or 3) a life insurance or endowment policy for an endowment or annuity contract.
A 1035 exchange is a terrific way to improve and update your annuity portfolio. For example, a new annuity contract may offer benefits that are more desirable or features such as safety of principal, a premium bonus, a higher return, interest rate guarantees, long-term care rider, guaranteed retirement income and death benefit protection. Some offer enhanced growth potential, which is uniquely valuable in helping to meet your long-term retirement income needs. In addition to new features and benefits, you might also want to exchange one annuity contract for another if you are concerned about the financial stability of the original insurance company or to consolidate several smaller policies into one for ease of management.
However, before attempting a policy exchange, make sure you know what you are doing. There are traps and pitfalls along the way. In addition, state insurance departments require that you receive adequate disclosure about potential surrender charges. Financial advisors are required to determine the suitability of an annuity for you and provide a “Statement of Understanding” showing that you understand all of the different elements in the contract, such as the crediting methodology and options for receiving income payments.
The bottom line: If you are interested in the idea of exchanging an older annuity for a newer policy, make sure you have all the facts to help you determine if a 1035 exchange is in your best interest. Take time to get the answers to all of your questions along with the advantages of various alternatives, consistent with your particular needs as well as the risks involved, especially if you are already retired. Decisions about life insurance and annuity policies can have an impact on your entire financial situation including the financial security of you and your loved ones.
Bill Griffith, Jr., CFP®
is principal of W.E. Griffith & Associates, LLC,
a wealth management firm near Pittsburgh, Pennsylvania. He has been
providing specialized strategies and services for ensuring long-term
financial independence and security for many years. He has written
numerous articles about various topics relevant to personal finance,
retirement and investment planning and is author of the books Securing
a Retirement Income for Life and More
Money for Retirement Right Now.
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