Annuity Sale Options
Selling your annuity comes with more flexibility than you might think. You can choose between one of three options:
1. Entire annuity
Selling your entire annuity provides you with a lump sum. The downside is that you won’t receive any ongoing income from your annuity in the future, which could decrease your financial security.
2. Portion of future annuity payments
An alternative is to sell a certain number of your future payments. You get a smaller lump sum now, then start receiving payments again once the period of the sold payments is over. So if you sold your payments for a three-year period, you’d get a chunk of money to help you out now, then resume your monthly payments at year 4.
3. Portion of dollar amount
Instead of foregoing your entire annuity payment for a certain period of time, you can also sell just a portion of each payment for a period of time. You get a small lump sum, but still continue to get monthly payments, just at a lower amount.
Before you make a decision, think about both your short-term financial goals as well as your long-term goals. Every individual has a different reason for selling their annuity but you want to make sure you capitalize on current opportunities while still feeling comfortable about your financial future.
The Process of Selling Annuities
There are four primary steps to selling your annuities. Here’s what to expect throughout the process:
Contact credible annuity buyers & get multiple quotes
Select the best quote and complete the application
(for annuities resulting from personal injury lawsuits only)
Receive your cash
Common Reasons to Sell Annuities
There are many reasons to consider selling your annuity payments. But first, it’s important to understand everything that goes into making your decision.
Selling investment and inherited annuities is a straightforward process that doesn’t require court approval. But when it comes to selling a structured settlement annuity contract from a personal injury lawsuit, there is a legal process that involves a judge’s approval. This process is part of the Structured Settlement Protection Act, as well as other state and federal laws that protect the rights of settlement holders.
The reason for a judge’s approval of the transaction is to make sure the sale would be in your best interest as the seller. Basically, the judge wants to make sure you fully understand what it means to sell your annuity, how much you’ll receive, and how the funds will be used in order to maintain a strong financial future.
That being said, here are some of the most common reasons people choose to cash in on those payments rather than receiving monthly or yearly installments over a set period of time.
Job Loss: Perhaps you’ve lost your job based or the ability to work due to an illness or accident related to your annuity, or maybe you’ve simply stumbled upon hard times. In these situations, people often choose to get a full or partial lump sum to help tide them over until replacement income is found.
Investment Opportunities: You can also sell your annuity to take advantage of a new business opportunity, launch your own company, or even pay for your own home.
Pay Debt and/or Medical Bills: A lump sum can save you money over time if you’re paying down a lot of debt. This could include balances from credit cards, student loans, auto loans, and medical debt. Depending on how much you owe and how much you’re paying each month, cashing out your annuity to help reduce those balances could be extremely beneficial.
Education: Whether it’s for you or a family member, paying for college tuition or other education expenses with your annuity funds can be extremely beneficial. Not only can you potentially save on interest from student loans, you can also set yourself up for better earning potential with a more advanced degree.
Decide how much money you actually need so you don’t sell more than necessary.
Discount Rate Explained
Every offer you receive from an annuity buyer includes a discount rate. Beware: this is how much of a discount the buyer receives — not you. In other words, you receive a lower amount than the actual total of the payments you’re receiving. It’s how the buyer makes money on the transaction and is similar to why banks charge interest when lending money.
Here’s an example. Say your remaining annuity payments total $100,000 over the next 10 years. Your buyer won’t give you the full $100,000. Instead, you might hypothetically receive an offer of $80,000 – or more or less depending on the buyer. Most buyers charge between 9% and 18%. Companies consider the following factors when calculating the discount rate:
- The value of remaining payments
- How many payments you’re selling
- The dates of the payments
- Interest rates on the annuity
- Buyer fees
- Market and economic conditions
The difference between your remaining annuity payments and your cash out amount is the discount rate. The higher the discount rate, the less money you receive. This is why it’s so important to shop around and compare offers from different annuity buyers. It’s standard practice in the industry but you still want to make sure you’re not being taken advantage of.
While selling your annuity does take some time, the decision-making process isn’t one you’ll want to rush through. Decide how much money you need, then compare different offers to choose the one that best serves your current and future financial situation.
Get multiple quotes instead of assuming that all companies will give you the same offer. Comparing more than one discount rate (and other terms) helps you feel confident when you finally make a decision.
Pros and Cons of Selling Annuities
Selling an annuity can be a beneficial choice. But just like any major decision in life, it can come with both pros and cons. Run through this list and think about how each advantage and disadvantage will affect you in the short term and long term.
Tax Implications of Selling Your Annuity Payments
There are different tax treatments depending on the type of annuity you sell. For structured settlement annuities that are from a personal injury lawsuit, there’s no tax because that money is not considered income.
However, there could be tax implications when selling investment or inherited annuities, so it’s best to get advice from a financial or tax professional.
How long does it take to receive a quote?
Most annuity buyers provide a free quote within minutes of giving them your information, although it could take as long as a day. You can either call a factoring company directly or fill out a contact form on their website to get a quote.
How soon will you get your money when cashing out your annuity?
Investment and inherited annuities typically take a month to process, since no judge approval is required. With structured settlement annuities, the timeline depends on when a court hearing is scheduled, which could take two to three months.
What fees should you expect during the transaction?
The major cost of selling an annuity is the discount rate. This is how much money you’ll lose by receiving your cash now rather than receiving it over a set period of time. Any administrative costs incurred by the buyer should be included in the discount rate.
What annuities can’t be sold?
There are a few types of annuities that legally cannot be sold. These include:
- 401(k) annuities
- Child support
- Disability payments
- Worker’s compensation
What is the present value of an annuity?
In order to calculate an annuity’s present value, you’ll first need to know the annuity’s future value. This includes the total of all the remaining payments (including interest). But to determine its present value, you’ll then need to subtract the discount rate from the future value.
What is a factoring company?
Companies that buy structured settlement annuities are also called factoring companies. They’re not lenders because you’re not borrowing money from them — you’re literally selling them your annuity at a discounted rate.
What are the different types of annuities?
In addition to structured settlement annuities there are several other types of annuities you may receive. These include:
- Pension annuities
- Lottery jackpot
What information do I need to sell my annuity?
Expect to supply the buyer with the following information before selling your annuity:
- The original annuity contract
- Two forms of ID
- A settlement and release agreement
Will I still pay premiums if I sell my annuity?
It depends on what type of transaction you choose when selling your annuity. If you sell your entire annuity, you’ll no longer pay a premium. But if you do a partial sale, you’ll still be responsible for those premium payments.