Beware of Variable Annuity Swaps

The Financial Industry Regulatory Authority (FINRA) warning to investors is quite simple. It tells investors to only exchange their existing annuity only when it is good for them and not better for the individual selling it. This was reiterated recently in a Wall Street Journal article warning investors about swapping their older existing annuities for newer ones. It explained that annuities purchased prior to 2007 likely have guaranteed minimum income payments that could offer better income than newer products.

In addition to the risk of losing the income guarantees of the older annuities, replacing them with newer products is expensive. It could mean higher fees, additional expenses and restrictions. There could also be surrender fees of up to 10% to exit the contract early.

Commissions and other benefits to the broker and the firm often control their recommendations. The commissions on variable annuities (VA) can be as much as 5% of the initial total investment, or more. The article also pointed out that this can be a way of generating new business for the firm. So, beware if your broker suggests that you trade your old annuity in for a newer, “better” model.

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