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Upgrade an Older Annuity with a 1035 Exchange

Carl Ostenson

Is it possible to upgrade your older annuity into a new one that has more benefits?

The short answer is, YES.

But the real answer is that it depends, and you need to do a little homework to be sure you are making your situation better, not worse.

First let’s go through some common reasons why people might want to switch from one annuity to another.

1)  Fees: This would apply mainly to Variable Annuities. The total fees can range from 2% to over 5% per year. It all depends on your particular Variable Annuity. It’s not that noticeable if the market is going up, but when it’s flat or down and the fees keep coming out, it can frustrate you. This isn’t saying that Variable Annuities are good or bad. It’s just one reason why people may want to investigate their options.

2)  Too Much Money in One Annuity Contract: Insurance companies have historically been very safe places to keep your money. Especially fixed annuities. They are legal contracts. But, the old adage “Don’t put all your eggs in one basket” applies to just about everything in my humble opinion.  Sometimes it may make sense to divide the money up among a few different companies. Maybe even keep each contract below the covered limit for your state Guaranty Association. This just gives you another level of safety and can help you sleep at night.

3)  Low Renewal Rates: Sometimes when the contract period is up, the renewal rates the insurance company offers you to stay are not that attractive. You can shop around and see if you can beat the renewal rates if you don’t mind starting a new contract period.

4)  Get Better Terms or Benefits: The last 3 to 4 years in the annuity business has brought about some new benefits that were not available before that.  Insurance companies are very innovative. They are constantly competing to get new business. There are newer Income Benefits and Long Term Care benefits that were just not available a few years ago. If these newer benefits would help your situation, it may make sense to take a look at them.

There are a couple different ways you can do an annuity upgrade.  

1)  10% Withdrawals: Most annuity contracts allow you to withdraw 10% of your account without any penalties. So let’s say you have $300,000 in one annuity. You could move $30,000 into a new contract without any penalties.

2)  Partial or Full 1035 Exchange: A 1035 Exchange is an IRS rule that allows you to transfer one annuity to another annuity and avoid paying taxes on the transfer. Some companies allow you to transfer just a portion, and some may require you to transfer the entire amount. The thing to watch out for is that there may still be surrender charges on your current annuity. Those would still apply with a 1035 exchange.

Things to watch out for:

  • How much is the surrender charge to switch? Your existing annuity came with surrender charges so you need to make sure that you aren’t making yourself worse off by moving to a brand new annuity.
  • New contract terms. By switching, you are entering into a whole new surrender period with the new annuity. Make sure that the new annuity is upgrading your situation and that the new terms are suitable for your needs.
  • The Death Benefit of your current annuity. In some cases the Death Benefit of your current annuity is much higher than the current account value.  So if you exchange your current annuity, you would lose the higher death benefit. Just something to be aware of.

Everything has Pros and Cons.

In some cases it makes perfect sense to upgrade an old annuity and is worth doing now.

In other cases, it doesn’t make any sense at all.

In my opinion the biggest reason to considering upgrading your older annuities are for the Income Benefits on the newer ones.  You can get guaranteed lifetime income, eliminating the risk of running out of money, without being forced to annuitize and lose control of your account.

The only way to really find out is to talk with an agent and do a comparison.

Click here (Carl Ostenson) to see more of this author’s articles.

About the Author:

Carl Ostenson specializes in helping his clients use their IRA or 401k to set up their Retirement Income Plan for when they retire. He works with clients in the Chicagoland area and surrounding suburbs.

If you live in Chicagoland and want to talk about annuities with a local guy, give Carl a call at 847-376-8400… there’s never any pressure. To get more about Carl, visit:

Be sure to check out his Free IRA Guide titled “How to Get Secure and Predictable Income From Your IRA/401k When You Retire.”


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