Annuity IQ

You would think I would be happy to see a positive article about exchanging one annuity for another, but guess again. When it comes to any 1035 exchange people should carefully weigh ALL of their options.

In this particular article an advisor, who is nationally syndicated and usually offers decent advice, suggested that a reader exchanges their variable annuity for another one. The issue the client has is they are afraid the market will have a down turn and their positive gains will be erased. Instead of recommending aspirin for the client’s headache the writer recommended cutting off their head.

The problem I have with this article is that the client is still in a surrender period and this writer suggested that the client switch into a bonus contract. Unfortunately, I see this tactic used way too often and sometimes it makes complete sense, but usually it does not.

Here is why it does not make sense in this case. The client is older, in their 70’s, and the contract has a 6% surrender penalty. The starting principal was $81,000 and the current value is $142,000.

In order to exchange the contract the investor would have to pay the 6% penalty on their initial investment of $81,000, this would cost them $4,860 in fees. In the article the advisor did acknowledge the fee, but he said it could be offset by a 5% variable bonus annuity contract. Which is true, but when he calculated the bonus amount he used the gross number of $142,000.

The reality is the bonus would only be paid on $137,140 or the net amount that makes it to the new carrier and not on the $142,000 as he suggested. The new bonus annuity contract would also start a new surrender period and have a higher cost than a traditional variable annuity. He recommended this so the client could step-up their living benefit to the current market value.

What the client should explore before they make this drastic maneuver is to see it the existing insurance carrier would allow them to upgrade their living benefit. Many carriers will let existing policy holders upgrade their older living benefit to a newer one. The difference is the client would not pay the surrender penalty and the broker will not collect a new commission.

As you already know, I am not anti-broker in anyway shape or form. What I do not like to see is bad advice geared to pay the broker and have little positive impact on the consumer. There are 100 good ethical reasons to exchange one variable annuity to another, but it is the one or two bad reasons which perpetuate the industries tarnish reputation. This is one of those examples of bad advice that could lead to problems for the agent down the road.

Think about this, if the new contract blows up for some reason and the client seeks the advice of an attorney it will not end well for the advisor. The attorney would ask why you recommended that the client pay a 6% surrender penalty to move to a new contract.

They would also investigate whether or not the newer benefit could have been added to the older contract, which would have saved the client thousands of dollars. In other words, the advisor will probably have to write some pretty big checks if this situation turned bad.

It is this type of situation that will continue to tarnish the annuity industry. If the client is worried about losing money or market volatility they should either see if the benefit can be upgraded or move the money into the guaranteed fixed account until they feel comfortable with equity investing again.

If you keep your business clean you will reap the rewards. This may not happen overnight, but it will happen over the long term. All of the big producing brokers I know have all been around for a long time and are very ethical. They attribute their success to always trying to do the right thing for their clients.

annuities work and are great investments, but by using a questionable sales practices, or by giving out questionable advice like this writer did, will only continue to hurt the industry. If we all work to always do the right thing for our clients we will see regulations decrease instead of increasing to an unreasonable level.