Financial advisors can sometimes find benefits for clients by switching one variable annuity for another, according to the Financial Industry Regulatory Authority.
The Internal Revenue Service allows the exchange of one VA contract for a new one without paying tax on the income and investment gains earned on the original contract. This can be a substantial benefit to the contract holder and is often used as a selling point, says FINRA.
The switch can be beneficial when the investment options available in a new VA are better suited to a client’s changing investment goals and objectives, the regulator says.
Another factor is cost: A new VA can sometimes be found that is less expensive than the client’s existing one. Determining whether the new VA really is less costly requires a conscientious side-by-side analysis to determine the true costs, which involves a variety of fees.
Finally, various benefits of the new VA may be more robust or better suited to the client than the benefits in the existing contract. For instance, the new contract might offer enhanced death and living benefits that will help the client achieve a specific financial goal, Finra says.
Considering each of these options will require due diligence by the advisor on the part of the client, including comparing the fund strategy, investment risk and diversification of the funds to see if they suit the client’s needs.
However, Finra also warns that there are times when an exchange is not a good idea. An insurance company offering bonus or premium payments as a primary enticement to make an exchange should be examined closely. The bonus is usually a specified percentage of the payments made during a certain time period. While this may sound like a good deal, variable annuities with bonus credits may have higher expenses that offset any gain, the regulator says.
Clients should be aware of any surrender charges and of any annual fees that may be attached to a new contract in exchange for new features, FINRA warns.
In a recent case in which switching contracts was not a good idea for the clients involved, FINRA fined MetLife Securities Inc. $20 million and ordered it to pay $5 million to eligible customers for omitting or misrepresenting the terms of replacement VA contract applications for tens of thousands of customers. It was the biggest fine ever levied by the regulator related to VA sales.