Investors Should Be Wary of Variable-Annuity Swaps
As explained in a recent Wall Street Journal article, investors should
be wary if their insurance agents, brokers, or financial advisers claim
that swapping their older variable annuities for newer ones would be in
their best interests. In fact, because of the poor market performance
from 2007 to 2009, variable annuities that were purchased before then
likely have guaranteed minimum income payments that could offer a better
income than either newer annuities or other kinds of investments, according
to the article.
Besides the risk of losing the income guarantees of the older annuities, swapping annuities could also mean higher fees, more expenses, and additional restrictions. Investors who swap annuities could also face a surrender fee of up to 10 percent to exit the contract early. The total amount owed would depend on how long ago the annuity was purchased.
"Unless it is a no-brainer and you can really show that what you are getting is better than what you are giving up" investors should stick with the annuity they already own, said one financial professional in the article.
Despite the potential pitfalls of annuity swaps, some brokers and brokerage firms continue to recommend them to clients. These recommendations are often based on the benefit to the brokers rather than what is best for the investor. Commissions on variable annuity sales can total 5 percent or more of an investor's initial deposit, according to the WSJ article. For this reason, FINRA has also warned investors to be wary of annuity swaps and has said that recommending an exchange "may be the only way a salesperson can generate additional business" in a declining market.
Swapping annuities could be in an investor's best interest if the investor would gain significantly lower fees without the loss of an income guarantee, a higher monthly income, or a product better suited to his or her needs.
"You should exchange your annuity only when it is better for you and not just better for the person trying to sell you a new annuity," warns FINRA.