A primer for fee-based financial advisors

Do your clients hold annuities? Over the last decade, hundreds of billions of dollar’s worth of annuities have been sold each year, with $432B in sales in 2024 alone.¹ There’s a good chance some of your clients own annuities – and you may not know it.

By asking each of your clients if they hold any existing annuities, you create greater visibility into their overall financial picture. Additionally, it creates the opportunity to introduce any clients already holding annuities to new options that may better suit their goals.

As defined in our Annuities Glossary, an annuity replacement, also known as a 1035 exchange, is “a transaction in which a new annuity contract is purchased using all or a portion of the proceeds of an existing annuity contract.”

Replacements happen most commonly at the end of an annuity term and, when done properly, can be completed without becoming a taxable event for your client. In general, an annuity replacement must meet three requirements to not trigger a taxable event:^{^^}

• The contract owner(s) must be the same.
• The qualified status of the contract must remain the same. Qualified funds must go into a new, qualified contract, while non-qualified funds must go into a non-qualified contract.
• The funds must transfer directly from the old carrier to the new one.

If the replacement meets these conditions, the funds in the annuity will remain tax-deferred until your client withdraws them in the future.

Knowing that replacements can be beneficial for your clients, it’s essential to develop a clear understanding of which clients hold annuities and the terms of each contract.

Start by simply asking each client if they hold any annuities. It’s possible they purchased one years ago with a long-forgotten broker. Your question might shake loose a memory for your client.

Once you learn of an annuity’s existence, ask your client to share more detailed information — they may be able to share a contract, current statement, or original brochures and materials. Review the details of each, or reach out to our Annuity Sales Specialists at annuities@flourish.com and we’ll help look for opportunities to surrender or replace the annuity, or activate an optional income stream. Our team of licensed annuity experts is here to help you review details and explore the options for your client’s specific needs. While replacements are always based on facts and circumstances, there are three common replacement opportunities that advisors should be aware of:

1. Fixed annuities at the end of their term

Fixed annuities are commonly used to provide maximum downside protection, while still allowing for some upside growth, and include both multi-year guaranteed annuities (MYGAs) and Fixed Indexed Annuities (FIAs). Both of these products offer options for guaranteed rates for all or some of the surrender period, but once the surrender period ends, the interest rate typically drops.^††

Clients may wish to replace their old fixed annuities with new annuities that offer more advantageous rates. View current MYGA rates through Flourish Annuities.^* Keep in mind that a 1035 exchange may initiate a new surrender period, which may make a replacement unsuitable for clients who need more immediate access to their funds. Our Annuities Specialists are available to help you review all details when considering a replacement.

 
2. Variable annuities that were purchased years ago

Older variable annuities may have high fees, which can create significant drag on market performance — our team recently came across an old variable annuity with all-in fees over 4% per year!

Additionally, variable annuities often are used to provide equity exposure within an annuity wrapper. If your client purchased the variable annuity years ago, their needs have likely changed and they may no longer want or need the same amount of equity exposure.

If they want less exposure and greater insulation from market volatility, a MYGA or Fixed Indexed Annuity might be the right fit. One of the key benefits of a fixed annuity is the guaranteed principal protection.††

If your client wishes to retain that equity exposure, consider exchanging their old variable annuity for a new Variable Annuity or Registered Index Linked Annuity with lower fees.

3. Annuities with outdated features

As clients' life circumstances change, their financial needs shift as well. If your client has an old annuity, it may have additional features — like an income rider or death benefit — that no longer provides value to them. These features typically increase the fees and decrease the performance of the annuity — meaning, your clients may be paying for features and benefits that they will never use.
 
If this is the case, speak with your client about annuity replacement options that maintain the core benefits of their current annuity, such as guaranteed rates or equity exposure, but forgo the unnecessary add-ons.