Before you switch insurance contracts, make sure you carefully compare the annuities' features and fees. By Courtney Schlisserman, Contributing Writer July 22, 2011 EDITOR'S NOTE: This article was originally published in the May 2011 issue of Kiplinger's Retirement Report. To subscribe, click here.You've held a variable annuity for some years. Now an insurance agent is pressuring you to trade in the contract for a newer model with extra features. Resist the hard sell: While the broker will pocket a fat commission, such annuity exchanges are rarely a good deal for investors, according to many financial experts. That's particularly true if you bought your annuity several years ago. You may lose valuable guarantees that have built up since the stock market declined during the recession. And, in most cases, the new features will not be worth the costs you will incur and the additional time your money will be locked up. Carolyn Walder, president of Lifetime Wealth Planning and Management, in Alexandria, Va., says that if you bought an annuity just before the recession and are being pitched a new one, you need to compare the two carefully. "In general, products today aren't as good as they were back then," she says. Advertisement Variable annuities, which are sold by insurance companies, are a combination of tax-deferred savings and insurance. You invest in a portfolio of mutual funds, which grows tax-deferred for several years before you begin to tap the assets. The payout will vary based on the growth of the underlying investments. Sales of variable annuities in the fourth quarter of 2010 reached $37.6 billion, up 18% over the same period in 2009, according to the Insured Retirement Institute. Driving this popularity are annuities with "living benefits," which companies began offering in the early 2000s. These products guarantee that you'll be able to withdraw a minimum amount of money each year for as long as you live. Many of these sales have been generated by swapping one annuity for another, says John Gannon, senior vice-president of investor education at the Financial Industry Regulatory Authority. This kind of trade is known as a 1035 exchange, named for the section of the tax code that allows you to switch to a new insurance contract without having to pay taxes on any investment gains in the original contract. Because so many sales are based on exchanges, says Gannon, "I caution users to make sure it benefits them" and not the agent. If you do an exchange, see that no money gets into your hands. If you sell the old annuity and use the proceeds to buy a new one, you'll be taxed. Advertisement There are times it makes sense to consider an exchange, especially if you don't need the money soon and you have time to allow the investments in your new annuity to grow. Perhaps your current annuity doesn't offer living benefits, or the new annuity has lower costs and better investments. But if you already own an annuity with living benefits, you need to be especially careful in comparing the features and costs of the two policies. After the stock market crash shrunk insurers' investments, companies cut costs by raising fees, lowering guarantees and restricting investment choices. Mark Cortazzo, a certified financial planner in Parsippany, N.J., uses the following example to show how policies with living benefits could differ. Let's say a couple, both age 55, plans to retire in ten years and invests $500,000 in a variable annuity. With one annuity offered today by Ohio National, the guaranteed-income pot will double in ten years. After ten years, the couple or surviving spouse gets a minimum payout of 5% a year -- or $50,000 -- even if the actual investment loses value over the ten years. If the investment gains value, the payout will be larger. This contract requires investors to put at least 30% of their investment in bonds. It may not make sense to buy this annuity if you own an older contract with better guarantees or fewer restrictions. Before the recession, for example, ING sold an annuity with a guaranteed withdrawal of 7% a year and no investment restrictions. Advertisement Or perhaps your current annuity allows you to take a lump-sum payment in a few years, Cortazzo says. To get the guaranteed 5% annual payout in this Ohio National product, you have to hold your money in it for ten years, Cortazzo says. "A lot of products available in 2006 and 2007, I would love to have available now," he says. "You don't want to walk away from those." You also need to consider what kind of cash you may be leaving on the table. Let's say you invested $100,000 in an annuity that allows you to withdraw 6% a year no matter how the underlying investments perform. If your account rises to $130,000, the annuity lets you take 6% on the $130,000 -- or $7,800. If the account declines, you can still withdraw $7,800 a year. But there could be a catch. If you decide to trade in your annuity for another one, you could end up receiving only the current account value, not the original investment. If the $130,000 drops to $80,000, you'll only be able to take $80,000 if you switch. And you'll lose the lucrative $7,800 yearly payout. Another reason to resist an exchange: Most variable annuities impose a surrender charge if you cash out or switch an annuity within a certain period of time, sometimes as long as ten years. The charges can be as high as 9% of your purchase payment, although it can decrease each year. Advertisement If you're still within the surrender period, you'll need to decide whether it's worth paying the charge to switch to another product. If you've completed your surrender period, be aware that the new annuity will start the clock ticking again. Don't agree to a trade if you think you will need to cash out before the new surrender period ends. Review Fees and Features Make sure to compare the fees of the two products. One of the biggest charges is the "mortality and expense" risk charge, which covers the insurer's cost of assuming the risk. This fee runs about 1.25%. Other charges include administrative fees and the costs associated with the underlying funds. Ask about the agent's commission. Annuity buyers will pay at least 2.5% in total fees, excluding commissions. If the newer annuity has features you find attractive, see if you can add riders to your existing contract. That could save you from a new surrender period and may be cheaper than purchasing a whole new product. For example, you can ask for additional death benefits, which cost an average of 0.39% in expenses, according to Morningstar, or you could add a guaranteed minimum withdrawal or income feature, for 0.92% in costs. Ask the agent if there are cheaper ways to get the new features you want. Let's say you like the long-term-care rider in the new product. This feature would allow you to withdraw funds from the annuity tax-free to pay for long-term-care services. Instead, ask what it would cost just to buy long-term-care insurance, says Gannon.