What Does “Refinancing an Annuity” Mean?
When homeowners refinance their mortgage, they’re replacing one loan with another for better terms. With annuities, “refinancing” usually means exchanging your current contract for a new one that better fits your situation.
This is typically done through a Section 1035 Exchange, which allows you to move from one annuity to another without triggering taxes.
Surrendering your annuity early can be costly. Surrender charges generally range up to 7%, and you could also be hit with a 10% tax penalty if you’re not 59 ½ years old yet. Plus, you will owe income tax on any profit — or annual return — you have made on the annuity. However, with a 1035 exchange, you can at least avoid the tax consequences.
Reasons People Refinance Their Annuities
Refinancing an annuity is rarely about chasing the “newest” product. Most people do it because their financial situation, retirement goals, or the annuity market has changed. The most common reasons people refinance include chasing better rates, lowering fees, adding features, changing the payout structure or aligning with new goals.
Chasing Better Rates
Interest rates fluctuate, and annuity contracts written years ago may have locked in at lower yields. Refinancing can allow you to:
- Move into a fixed annuity or MYGA with higher guaranteed interest.
- Capture better lifetime income payout rates if you’re closer to retirement.
Example: A retiree with a 2% fixed annuity refinanced into a 4.5% MYGA, nearly doubling their guaranteed growth without additional risk.
Lowering Fees
Variable annuities can come with layered fees for management, riders, and mortality charges. Refinancing may help you:
- Reduce or eliminate annual fees by moving to a fixed or indexed annuity.
- Simplify your contract so more of your money works for you.
What users say: “The product the agent steered me towards was a fixed annuity and was a life saver for me… the agent knew what my needs were and met them.” — Bob Y.
Adding Features You Don’t Have
Older annuities may lack modern riders. These features can provide peace of mind, especially if health or family needs have shifted. A refinance could add:
- Long-term care riders to help cover nursing home or assisted living costs.
- Inflation protection riders that increase your income as costs rise.
- Lifetime withdrawal benefits that ensure predictable income even if your account value runs out.
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Changing Payout Structure
Life circumstances evolve, and payout preferences may too:
- Switch from deferred growth to an immediate income annuity for retirement paychecks starting right away.
- Move from a single-life payout to a joint-and-survivor annuity to guarantee a spouse continues receiving income.
- Opt for a period-certain feature to protect beneficiaries.
Example: A couple in their early 60s refinanced from a single-life annuity into a joint annuity so that both partners would receive income for life.
Aligning With New Goals or Life Changes
Major life events often spark a review of old contracts:
- Divorce may shift financial priorities or require splitting assets.
- Inheritance or windfall can allow consolidation of funds into a stronger product.
- Changing risk tolerance — moving from growth-oriented products into safer, income-guaranteed options as retirement nears.
Refinancing isn’t always about what’s wrong with your current contract — it’s about making sure your annuity still supports your retirement lifestyle today, not just when you first bought it.
Old Annuity vs. New Annuity
| Reason to Refinance | Old Annuity | New Annuity (Refinanced) | Real-World Impact |
|---|---|---|---|
| Rates | Locked in at 2% years ago | Current MYGA at 4.5% | Doubled guaranteed growth without extra risk |
| Fees | Variable annuity with 2–3% annual fees | Fixed or indexed annuity with little to no fees | More money goes toward income, not charges |
| Features | No riders available | Riders for inflation, long-term care, or lifetime withdrawals | Added protection against rising costs or health events |
| Payout Structure | Single-life payout only | Joint-and-survivor or period-certain options | Ensures spouse or heirs continue receiving benefits |
| Life Alignment | Bought before divorce/retirement/windfall | Updated to match new family or financial situation | Greater flexibility and peace of mind |
How the Process Works
Refinancing an annuity isn’t complicated, but it does involve several careful steps to protect your money and avoid unnecessary costs. Here’s what to expect:
- Review your current contract – Before making any moves, look closely at your existing annuity. Identify surrender charges, rider values, and guaranteed benefits you’d lose.
- Compare new options – Once you know what you might give up, evaluate whether new contracts outweigh those trade-offs. Look at updated rates, fee structures, and available riders.
- Request a 1035 exchange – A 1035 exchange is the IRS-approved way to move from one annuity to another without triggering taxes. Your new insurer handles the transfer directly.
- Finalize your new contract – Once the transfer is complete, you’ll receive documents for your new annuity. Confirm terms, riders, and payout options match your goals.
Most states require a free-look period (usually 10–30 days) that allows you to cancel your new contract for a full refund. This is your safety net if you feel uncertain. After this window closes, surrender charges may apply if you exit early.
Get Guidance Before You Decide
Refinancing an annuity can be a smart move — but it’s not always the right move. Because the decision involves surrender charges, IRS rules, and contract fine print, professional advice is key.
