Key Takeaways
- Annuities may move from one provider to another if the company chooses to sell off its annuity contracts or if the company goes under and must be bailed out by a healthy insurer.
- You may also choose to change your annuity contract to another provider using a tax-free 1035 exchange.
- If your provider changes, the transition will likely take between 30 and 45 days, during which any periodic annuity payouts will likely continue as scheduled.
Why Do Annuity Providers Change?
Your annuity may move from one provider to another for many reasons. Sometimes, the company you purchased your annuity from may decide to stop selling annuities and have their existing contracts reinsured by another firm. This has been the case with companies like John Hancock, which had its annuities reinsured by Venerable.
Annuities may also move from one provider to another if the company that owns the annuities becomes insolvent.
A common concern expressed by annuity customers is, “What will happen to my annuity if the insurance company goes under?” While annuities are considered very safe products, they are not backed by federal government insurance like CDs are.
Instead, insurance companies that offer annuities join state guaranty associations. The primary purpose of these nonprofit organizations is to protect consumers in the unlikely event that an insurance company becomes insolvent and cannot pay its obligations. “State guaranty associations are an important component of consumer protection, providing a safety net for policyholders in the event an insurer fails,” Linda Chavez, a licensed insurance agent and founder of Seniors Life Insurance Finder, told Annuity.org.
When an annuity provider becomes financially unstable, the other members of that provider’s guaranty association step in to ensure that all the contracts the provider owns continue to be covered. In most cases, this means that a healthy insurer will assume responsibility for the insolvent insurers’ policies and annuity contracts.
If your annuity is transferred to a new provider, it is not necessarily a problematic situation. Just make sure the new provider is financially stable and responsive to your needs. The best way to assess the financial strength of an insurer is to reference its AM Best financial strength rating.
Thomas J. Brock, CFA®, CPAInvestment, Corporate Finance and Accounting ProfessionalThomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.
Choosing To Change Providers
On the other hand, you may decide you want to change your annuity provider. This can be tricky, as withdrawing an annuity contract typically incurs a heavy tax penalty. However, there is a way to change your annuity contract without withdrawing your old annuity and purchasing a new one.
You can avoid surrender charges and withdrawal penalties by exchanging your annuity through a 1035 exchange. This is a tax-free exchange codified by the IRS to allow taxpayers to exchange one annuity contract for another without incurring any tax liability.
A 1035 exchange must be completed within 30 days and the annuity owner must be the same for the old contract and new contract. You can perform a 1035 exchange by contacting your old annuity provider and your new provider and completing the application, as well as the 1035 transfer request form.
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What To Expect If Your Annuity Provider Changes
If your provider transfers ownership of your contract to another insurer, you can expect the process to be completed in 30 to 45 days. You probably won’t be required to complete any paperwork to help facilitate the transition.
Your current provider should provide you with enough notice before the transfer. However, in some cases, an insurer’s failure may be quite sudden. If this happens, your annuity funds may be inaccessible for a short time while the state guaranty association completes the transfer to a healthy company.
During this transition, if your contract has been annuitized, you should not experience an interruption in receiving your scheduled payments. However, if you intended to opt for a lump-sum payout, the guaranty association may restrict that payout until the failing insurer’s assets have all been accounted for.
When changing an annuity yourself, be sure to ask for and read all the disclosure information for your old and new contracts. The annuity agent you work with should provide you with a replacement notice telling you the benefits and limitations of the new annuity.
Just like when you buy a new annuity, you will have a free look period when replacing an annuity during which you can cancel the new contract and receive a full refund.
Use this time to carefully review the terms of the contract and make sure it meets your needs. You may even want to reach out to a financial advisor if you haven’t already been working with one to make sure you fully understand how the annuity works.
Can Your Annuity Benefits Change Under a New Provider?
As previously mentioned, you should continue to receive scheduled annuity payments even if your annuity changes providers. But if you have a contract that hasn’t been annuitized, you may wonder if your annuity’s value and benefits will stay the same under a new provider.
State guaranty associations ensure that the accumulated value of deferred annuities is protected if a provider fails. However, this doesn’t mean that your annuity benefits cannot change under an annuity provider.
For example, many variable annuities are sold with living benefits that promise a guaranteed minimum income or other benefits. These riders may not be covered when an annuity changes hands to a new company.
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Frequently Asked Questions
Annuity company failures are exceedingly rare; there have only been 17 reported failures of insurance companies in the last 10 years.
If your annuity provider fails, the state guaranty association will help by transferring your annuity to a healthy insurer or paying out the value of your annuity up to $250,000.
Annuity providers may change if your provider decides to stop selling annuities and have their existing contracts reinsured by another company.
Usually, a provider change will not impact your annuity benefits. However, some living benefits offered by variable annuity providers may not be covered by state guaranty associations if your annuity provider becomes insolvent.
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