The exchange from one Annuity to another Annuity is basically looking at all of the features, interest rates, cap and floor rates and making the choice to exchange them for better terms. If you see the IRS linked bulletin above it breaks down all of the rules we will have to follow. The process once selected will take from 7-21 days on the carrier side, but you can take as long as you want to compare the differences. Do not cancel or surrender the old contract. That is not an exchange if you do that.
A tax-free section 1035 exchange is the exchange of (a) a life insurance contract for another life insurance contract, or for an endowment or annuity contract, or for a qualified long-term care insurance contract; or (b) a contract of endowment insurance for another contract of endowment insurance that provides for regular payments to begin no later than they would have begun under the old contract, or for an annuity contract, or for a qualified long-term care insurance contract; or (c) an annuity contract for an annuity contract or for a qualified long-term care insurance contract; or (d) a qualified long-term care insurance contract for a qualified long-term care insurance contract. A contract shall not fail to be treated as an annuity contract or as a life insurance contract solely because a qualified long-term care insurance contract is a part of or a rider on such contract. However, the distribution of other property or the cancellation of a contract loan at the time of the exchange may be taxable on a separate Form 1099-R.
Only you can decide
We offer all kinds of Annuities. They do change over the years and sometimes the rates and product features are improved from your current contract. We only want to provide you with the most up to date information we have. We can show you all of your options, tax consequences if any, and prospective returns for the future. If you think you are a candidate for an Annuity Exchange, please feel free to reach out to us so we can provide you with all the information needed to make an informed choice.
How to Exchange your Annuity
First of all you need to understand that there are major differences with annuity products from year to year. Carriers are always changing products to keep up with demand and market conditions during that time frame. If your annuity if almost at its maturity date, take a while and look around not only at your current carriers updated products but other competing products to see if that product meets your needs. It is extremely important to notice any different terms and conditions as with any contract. Once you have chosen a replacement annuity, see out an expert broker to help facilitate the transaction.
It does not have to be the same broker or carrier, but when exchanging annuities, it is important to keep the same language when speaking about your current product. One example would be if a broker asked you if your current product is either qualified or non qualified. You as the investor should know the difference and seek out a matching product that fits into that category. If you annuity is a qualified annuity, then the exchange would be a tax free event if it was a qualified IRA annuity. If your current annuity is a non qualified annuity, then you would not have to worry about taxes because the exchange would be tax free anyway from one non qualified annuity to another non qualified annuity.
The term non qualified means that the product is created with after tax money and you would only be taxed on the gains when taken as income. It is also important to understand that if and when you would take distributions from your non qualified annuity, that it would disbursed with the exclusion ration in mind. The exclusion ratio is what amount of principal and what amount of interest is actually taken and what amount creates a tax issue for you when you take the income.