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If you own an annuity and find yourself in a situation where you're no longer satisfied with it, or your circumstances have changed, section 1035 of the IRS code allows you to exchange it for another annuity without incurring any tax consequences. To do that, you need to work with a 1035 exchange company that not only offers the annuity product you're looking for but also handles the exchange, including the transfer of funds between the two contracts.
The challenge is there are dozens of annuity providers and hundreds of annuity products, making it extremely difficult to thoroughly evaluate and identify the best companies and annuity products to suit your needs. In this roundup, we do the legwork for you.
One of the best features of an annuity is the guarantee of principal by the annuity provider. However, that guarantee is only as solid as the financial strength of the provider. When looking for the best 1035 exchange company, that is where you should start. Then you can look at other factors, such as features and options that help you achieve your objectives. If you are thinking about exchanging an annuity, your search should start here, where we review the best 1035 exchange companies in six different categories.
Best 1035 Exchange Life Insurance Companies in 2022
- Best Overall: Lincoln Financial Group
- Best for Financial Security: New York Life
- Best Multi-Year Guaranteed Annuity: American National Insurance
- Best Immediate Annuity: Mutual of Omaha
- Best Fixed Index Annuity: Nationwide Insurance Company
- Best Variable Annuity: Vanguard Variable Annuity (Issued by Transamerica)
Best Overall : Lincoln Financial Group
Always an innovator in the annuity space, Lincoln Financial Group offers the most comprehensive array of top-rated annuities, making it our choice as the best overall company for 1035 exchanges.
Highly rated for financial strength
Wide array of top-rated annuity products
Stellar industry reputation
Competitive rates and pricing on all products
Does not offer online quotes for annuities
If you're looking to exchange your annuity for a better product, you can't do much better than highly rated Lincoln Financial Group. The company boasts several annuities under the name Lincoln National that are recognized in Barron's "Top 100 annuities." That makes Lincoln Financial our choice as the best overall company for 1035 exchanges.
Founded in 1905, Lincoln Financial has grown to become one of the largest life insurance companies in the U.S., earning top awards along the way. In 2016, it was named by World Finance Magazine as the best life insurance company in the U.S. In 2019, the company also garnered the top spot in the indexed annuity space with the "Best Variable Index Annuity Carrier Award" from Structured Retail Products. The company also offers a wide array of top-rated life insurance products.
The company's excellent financial strength is evidenced by its ratings, including an A+ by AM Best, A+ by Fitch, and A1 by Moody's, which are among the highest in the industry. In J.D. Power's 2021 U.S. Life Insurance Study for overall customer satisfaction, the company ranks 12th out of 21 companies.
Lincoln Financial offers 1035 exchanges on all its annuity products, including its top-rated immediate and deferred income, fixed, variable, and index annuities. Its flagship annuity product is its top-rated Lincoln Level Advantage indexed variable annuity that offers investors more ways to grow their savings with added levels of protection during market declines.
Its 1035 exchange process is reasonably straightforward, offering investors a way to complete a PDF form that is e-signed online for quick turnaround. The company takes care of surrendering your original annuity and transferring the funds directly. The process can vary depending on the types of products you are exchanging, but the company aims to complete the exchange within one to three weeks.
Lincoln Financial does not charge any fees to process a 1035 exchange, but customers may pay a surrender fee to the former company. Generally, Lincoln Financial's contract and management fees on its annuities are competitive depending on the product you choose.
Best for Financial Security : New York Life
One of only three life insurers to hold the highest ratings from the four independent rating agencies, New York Life also offers a solid lineup of annuity products, making it our choice as the best 1035 exchange company for financial security.
Highest possible ratings from the major rating agencies
Low initial investment
Highest possible score from J.D. Power
Annuity interest rates and payout rates just around average
Since its founding in the mid-1800s, the name "New York Life" has become synonymous with financial security. It's one of only three life insurance companies as of January 2022 to hold the highest ratings from AM Best (A++), Fitch (AAA), Standard & Poor's (AA+), and Moody's (Aaa), and it's the fourth-largest life insurer in the U.S. in terms of assets. With its superior financial strength and a solid lineup of annuity products, New York Life Insurance makes our list as the best 1035 exchange company for financial security.
While all of its annuities are reliable products, you go to NYL for the extra peace of mind, not necessarily for the most competitive rates. You may give up a little bit of yield when choosing an NYL fixed annuity, but if financial security is a top concern, it may be a sound tradeoff. NYL's payout rate on immediate income annuities is better than average, and it has some competitively priced variable and index annuity products.
NYL's 1035 exchange form is available online. Alternatively, you can contact an NYL agent for help completing the form. The exchange can be completed within one to three weeks.
There are no fees for processing the 1035 exchange, but your former annuity company may deduct surrender fees. NYL's contract and management fees for its annuities are about average compared to other companies.
In J.D. Power's 2020 U.S. Life Insurance Study for overall customer satisfaction, NYL tied Nationwide Mutual Insurance Company for first among annuity providers.
Best Multi-Year Guaranteed Annuity : American National Insurance
American National is the highest-rated life insurer, offering a 2.55% rate on its 10-year guaranteed annuity (MYGA), which is why we chose it as the 1035 exchange company with the best multi-year guaranteed annuity.
Well-established, financially stable company
Highest rates on fixed annuities by a highly rated company
Can choose from three- to 10-year terms to lock in a rate
No option to file 1035 form online
10-year surrender period
Although American National Insurance Company has just an A rating from AM Best, that's still considered "excellent" financial strength. Most other companies offering a MYGA rate of better than 2.0% are rated below A, which could raise concern over their financial stability. American National offers both, which makes it our choice as the 1035 exchange company that's best for multi-year guaranteed annuities.
While it's much smaller than Lincoln Financial and New York Like, American National is a well-established (founded in 1905) insurance company that has received an A rating from AM Best for 75 straight years. The company also has an A rating from Standard & Poor's.
American National is probably best known as a national auto insurance company, but it also offers a wide array of life insurance and annuities. Right now, with interest rates hovering around their historic lows, its MYGA products are getting a lot of attention.
Its Palladium MYG annuity products are offered with six different terms, from three to 10 years. With the Palladium MYG 10, you can lock in a 2.55% rate for 10 years. The Palladium MYG 9 also locks in a 2.55% rate for nine years. Even its three-year term product pays 2.10%. Those rates are better than multi-year term certificates of deposit, and the earnings are tax-deferred.
There are no fees associated with these annuity products—no sales load, no contract fees, or ongoing maintenance fees. However, as with most annuity products, there are surrender charges should you need to withdraw more than 10% of your balance in any given year. The surrender charges start at 8% and decrease to 1% over 10 years. After 10 years, there are no surrender charges.
Processing times can range from two to four weeks, depending on the type of annuities you're exchanging.
Best Immediate Annuity : Mutual of Omaha
You may find immediate income annuities with higher payout rates, but few companies offer the range of options and customizations offered by Mutual of Omaha. That's why it makes our list as the best 1035 exchange company for immediate annuities.
Well-known and trusted brand
Highest possible ratings from AM Best, Fitch, and Standard & Poor's
Most comprehensive range of options for customizing income payments
Above-average payout rate
Commission is slightly higher than average
No online option for submitting 1035 exchange form
Mutual of Omaha's immediate annuities were rated among the top five in three categories in Barron's "Top 100 Annuities." While a few companies offer a higher payout rate, none of them provide the range of options and customization many people look for in an immediate annuity. That makes Mutual of Omaha our choice for the best 1035 exchange company for immediate annuities.
Established in 1909, Mutual of Omaha is a well-known and trusted brand in the U.S. It holds the highest possible ratings from AM Best, Fitch, and Standard & Poor's. It offers a solid lineup of life insurance and annuity products. But the annuity product that gets the most attention is its Ultra Income immediate annuity.
We count at least 11 ways that riders and options can be added and combined to customize income payments according to an annuitant's changing needs. For example, you can choose a fixed percentage increase of your annual payout to account for inflation. You can even choose a fixed dollar amount increase. You can also adjust the payment amounts according to your monthly bills. That amount of flexibility and customization can bring more peace of mind to annuitants.
If you want to initiate a 1035 exchange for a Mutual of Omaha annuity, you are encouraged to contact one of their agents. You can find an agent near you on their website.
There are no fees charged for processing a 1035 exchange or for annual maintenance of the immediate annuity contract. However, Mutual of Omaha does pay its brokers a 4% commission, which is slightly higher than the average. While you don't actually pay the commission, it can affect the amount of your income payout. Still, Mutual of Omaha's income payout compares favorably with its top peers.
J.D. Power ranks Mutual of Omaha fifth out of 23 companies in its 2020 U.S. Life Insurance Study for overall customer satisfaction, and it receives a 4.4 rating out of 5 from Consumers Advocate.
Best Fixed Index Annuity : Nationwide Insurance Company
Most fixed index annuities offer either a competitive, guaranteed income stream or the potential for growth. Nationwide manages to offer both, making it our choice as the 1035 exchange company with the best fixed index annuity.
Top financial strength rating
Top fixed index annuity product with both higher growth potential and strong income guarantee
Ranks third in J.D. Power customer satisfaction survey
No online option for submitting 1035 exchange form
Fixed index annuities (FIAs) are hot these days. Investors like them because they offer certain guarantees with a reasonable opportunity for growth. Most providers offer either a competitive guaranteed income rider or a competitive index participation rate (the growth component). But few companies offer both. Nationwide is one the few, which is why it is our choice as the 1035 exchange company with the best FIA.
With nearly $250 billion in assets, and the highest possible ratings from AM Best, Fitch, and Standard & Poor's, Nationwide is as solid a life insurance company as you'll find. It offers a complete range of life insurance and annuity products that receive high marks. But its FIA product, New Heights 12, stands out.
Nationwide's FIA offers investors to participate in up to 160% of an index's gain, which is substantially higher than other FIAs. The only downside is its 12-year surrender period, which is longer than most annuities. But the more extended surrender period allows Nationwide to offer excellent rates.
On the other side, the New Heights 12 FIA guarantees you will never lose any of your initial investment or credited earnings due to the performance of the underlying index. It will also offer a return of purchase payment guarantee if you surrender your contract after the end of the ninth contract anniversary.
All paths to a 1035 exchange go through Nationwide's customer service, which you can contact by phone or online. A 1035 exchange takes about three weeks.
Nationwide is a well-regarded company, ranking third among life insurers in J.D. Power’s Life Insurance Study on overall customer satisfaction. It is ranked first (tied with New York Life) among annuity providers.
Best Variable Annuity : Vanguard Variable Annuity (Issued by Transamerica)
The Vanguard Group has taken the same attributes (low costs and superior investment management) that have made it one of the top investment companies and put them into its variable annuity, making it our choice as the best 1035 company for variable annuities.
Investments managed by world-renowned Vanguard Group
Among lowest total costs in the industry
No surrender charges after age 59 1/2
Powerful guaranteed income rider
Flexibility to add and withdraw funds
Serviced by Transamerica Financial, which doesn't have the best customer satisfaction ratings
The big knock on variable annuities has always been about their high expenses. The Vanguard Group, which has been the primary driver of low-cost index funds over the last decade, is also at the forefront of low-cost variable annuities. Throw in its top-tier investment management and its groundbreaking income guarantee rider, and you have the 1035 exchange company with the best variable annuity.
The pioneering Vanguard Group was founded in 1975 as an antidote to high-cost mutual funds. Vanguard has since become the world's largest fund provider, managing nearly $9 trillion. The company is able to keep fees low because it's owned by its fund shareholders. Vanguard is considered one of the most trusted financial institutions in the U.S., but it should be noted that Vanguard's variable annuity is actually issued and serviced by Transamerica Financial Life Insurance Company, which has an A rating from AM Best.
With an expense ratio between 0.38% and 0.67% depending on the investment allocation, the Vanguard Variable Annuity is far less expensive than the industry average of 2.25%. Also, Vanguard doesn't charge a sales load and, for investors ages 59 1/2 and older, it doesn't charge any surrender fees, which is unheard of in the annuity space.
To initiate a 1035 exchange for a Vanguard Variable Annuity, you must contact a Transamerica customer support person. The process takes about three weeks. You can go to the Vanguard website to use a calculator (data provided by Morningstar) to compare your current annuity to a Vanguard annuity. The calculator will tell you if the exchange makes sense based on your circumstances.
Vanguard receives a 4.9 out of 5 stars from Consumer Advocates. The one downside of this variable annuity is that its issuer and servicer, Transamerica, is ranked just 18th out of 23 life insurers by J.D. Power, an indication that its customer service could be less than top-notch. You must decide if having the best variable annuity with average customer support is a worthwhile tradeoff.
The Bottom Line
The first consideration when looking to do a 1035 exchange with your annuity is the annuity provider's financial strength. Based on that, you can't go wrong with any of the 1035 exchange companies on this list. All are rated A or better by AM Best, and all are well-established financial institutions. However, the provider you choose may be based on the type of annuity product that best fits your needs and circumstances.
If you are concerned about financial security, there are few 1035 companies as sound and safe as New York Life. But if you instead want to go with the best overall—for competitive products, reasonable fees, and dependable customer support—there's none better than the Lincoln Financial Group.
It may be in your interest to diversify your annuities among two or three of these great 1035 exchange companies.
|Why We Picked It||Company||AM Best Rating|
|Best Overall||Lincoln Financial Group||A+|
|Best for Financial Security||New York Life||A++|
|Best MYGA Annuity||American National Insurance||A|
|Best Immediate Annuity||Mutual of Omaha||A+|
|Best Fixed Index Annuity||Nationwide Insurance||A+|
|Best Variable Annuity||Vanguard Variable Annuity (Issued by Transamerica)||A (Transamerica)|
What Is a 1035 Exchange?
A 1035 exchange is a provision in the IRS code that allows annuity owners to exchange an existing non-qualified annuity for another. For annuity owners who are no longer satisfied with their current annuity or whose objectives have changed, a 1035 exchange allows them to transfer their funds directly to another annuity provider without any tax consequences. To avoid possible tax consequences, the new annuity provider should initiate the 1035 exchange by requesting the surrender of the original annuity and having the funds transferred directly between providers. Although there are no tax consequences with a 1035 exchange, the annuity owner may be subject to surrender charges on the original contract, except when an annuity is being exchanged for another within the same company.
Frequently Asked Questions
What Qualifies for a 1035 Exchange?
Generally, any annuity that is non-qualified (not part of a qualified retirement plan) can be exchanged for another annuity product, except where the original annuity is an immediate income annuity already in the payout stage.
Also, a life insurance policy may be exchanged for another life insurance policy, an annuity, an endowment contract, or a long-term care policy. However, an annuity may not be exchanged for a life insurance policy or endowment contract. You can also exchange an endowment contract for another endowment contract, as well as an annuity contract or long-term care contract.
The owner and annuitant on the new contract must remain the same as under the old contract, though they can make changes once the exchange is complete.
How Many Times Can You Do a 1035 Exchange?
There is no limit on the number of times an annuity can be exchanged for another as long as the owner and the annuity product meet all the requirements.
Can You Do a Partial 1035 Exchange?
Section 1035 of the IRC allows for a partial, tax-free exchange where only a portion of an annuity contract is exchanged for another. To prevent abuse of this provision, the IRS requires that no distribution be taken from the original contract or the new contract within 12 months of the exchange. Otherwise, the IRS may treat the distribution as part of the exchange transaction, which means it could be taxed.
How We Chose the Best 1035 Exchange Companies
The challenge in selecting a 1035 exchange company is there are dozens to choose from. But because annuities are only backed by the financial strength of the provider, we immediately narrowed the choices to those with top ratings from AM Best, Fitch, and Standard & Poor's. A top rating from these rating agencies provides assurance that the companies have more than enough reserves to meet all their obligations.
We then narrowed the list of those companies offering top-rated annuities in one category or another, focusing on the one product that stands out for features, costs, rates, flexibility, options, and customer satisfaction. We also focused only on companies with a more liberal 30-day free look period. With that, we narrowed the list from twenty to the best companies in six different categories.