In the face of an investment opportunity, large amounts of debt or unexpected medical expenses, selling part or all of your annuity may give you the financial freedom you need.
Selling annuity payments could be the solution for an array of financial woes. Whether that includes buying a new house, paying for a new car, paying for college tuition or even balancing medical expenses, cashing out a portion of your annuity could be the solution to avoiding unnecessary debt.
However, it is important to understand the risks when deciding to sell a portion or all of an annuity. Selling an annuity comes with a slew of transactional fees, interest fees, and other costs depending on how early annuitants withdraw funds. It can also reduce the number of future payments an owner or his beneficiaries receive.
Reasons to Sell Annuity Payments
There are plenty of reasons for selling annuity payments, but some of the most common include:
- Losing a job
- Investing in a business
- Paying medical bills
- Paying off debt (student loans, credit card bills, etc.)
- Paying for school tuition
- Buying a new home
- Buyer’s remorse
Annuity owners have several options when selling their payments, including selling the entire annuity, part of it, or a lump sum amount.
Prior to selling your annuity, it’s important to seek counsel. During your consultation with CBC Settlement Finding, our customer representatives will be able to answer any questions you may have regarding the selling process and offer suggestions. It is also important to consult your attorney or accountant before deciding to sell your annuity. In many states this is legally required.
- Does my attorney agree with my decision to pursue pre-settlement funding?
- What are the online reviews for the company I’m considering working with?
- Is my case “high risk”? This may affect fees.
- Am I able to secure funds in other ways, such as a private loan?
The entirety — or straight — purchase is the most common option in selling an annuity. This strategy includes selling the annuity for the full term of the contract. This means the entire investment is emptied, providing the owner with a lump sum of cash in hand. The entirety purchase eliminates any chance to receive future income payments from the annuity contract, but in turn provides the opportunity to invest or pay off debt using a lump sum.
Lump Sum Purchase
The Annuity Selling Process
Step 1 – Ask For Guidance
If you’re thinking of selling your annuity, it’s important to first seek guidance from a trusted financial advisor or attorney. Both can help to determine whether this decision could hurt your financial future, in addition to presenting helpful alternatives.
Step 2 – Get a Quote
Step 3 – Schedule a Court Date
Annuity Sale Factors
When considering whether to sell your annuity, it’s also important to consider all the factors involved with the sale, including the value of your annuity, discount rates and tax implications.
- Discount Rates – When you sell your annuity, you will not be paid the full amount the annuity is worth. In exchange for receiving a lump sum up front, you will agree to sell your annuity at a discounted amount based on predicted future interest rates. This percentage is called a discount rate. When researching annuity buyers, make sure to ask what discount rate the company prefers to use. The lower the discount rate, the more money the seller will receive in their lump sum payout.
- Annuity Value – Besides the discount rate, other factors that will impact the value of your annuity, or how much a buyer will agree to purchase it for, are how much you wish to sell, the current economic conditions, predicted future economic conditions, fees or charges your annuity carries and frequency of your payments.
How Much is My Annuity Worth?
Pros and Cons of Selling
Cashing out on annuity payments can help to alleviate debt and other financial strains. On the other hand, selling your annuity can impact your financial future. Before making such a significant financial decision, the annuity owner must weigh the pros and cons. Sometimes short-term pleasures can affect a long-term financial cushion.
Pros to selling your annuity include:
- Instant Cash – If you need quick cash for an emergency payment, investing in a new home or any other incidental, annuity owners have more efficient access to funds versus waiting years for the first payment.
- Less Debt – Selling annuity payments can help to pay off debt once they’re cashed out. If you have college loans that need to be paid off or if you are still in debt from a home repair, sold annuity payments can help.
- More Options – Annuity owners do not have to sell all of their payments for cash. There are a multitude of options to receive quick cash while still being able to invest in a future financial cushion.
- Reduced Future Income – Although quick cash can help to prevent financial woes, annuity owners must remember that selling your annuity early can affect your long-term retirement savings and investments. Using payments now reduces the number of payments you’ll receive in the future.
- Buyer’s Remorse – Using invested payments for unnecessary expenses can hurt in the long-term. Easier access to a lump sum of money can lead to irresponsible spending habits and unnecessary purchases.
- No Full Price Payments – If you to choose to sell half of your annuity payments, you will not receive the entire half in a lump sum. The amount of transactional and withdrawal fees charged determines the amount of interest you will have to pay to receive immediate cash.
Selling My Annuity Payments: FAQs
Whether or not annuity payments are taxed when sold to a structured settlement buyer depends on the nature of the annuity. In most cases, such a transfer is tax exempt under current Internal Revenue laws.
This said, there are many different kinds of annuities, and these are different from the kind of structured settlements that one may receive from a successful lawsuit or a large insurance settlement. An annuity may come from some type of monetary account or a life insurance policy. Annuities from a 401(k) or other retirement account are taxed as soon as you start drawing out the money at retirement, though they are tax-deferred while the worker is making contributions.
Keep in mind that unlike a structured settlement from a lawsuit, an annuity is an investment vehicle that the beneficiary contributes to over time, building a cash reserve from which s/he can receive regular payments later on (a good example is a life insurance policy).
There may or may not be tax penalties if you sell an annuity for cash. A great deal depends on the nature and source of the annuity, whether you are the original owner or received it as a gift or legacy. If you have questions about the tax liability associated with selling an annuity, it is strongly recommended that you consult with a tax attorney or CPA prior to contacting CBC.
When you are looking to sell your future payments, it may not be the best idea. Perhaps you rely heavily on the income or the offer you have received isn’t the best you can do. This is why selling your future payment requires court approval. The courts are supposed to review the transaction to determine if it is in your best interest. So how can they do that if they don’t know why you need the money? Sure it is in the documentation but hearing the reason directly from you makes a huge difference.
Prior to 1970, injured parties would receive cash lump sum payments. Due to a series of unfortunate events in Canada and Europe, there was a need for settlement money to last throughout an injured party’s lifetime. As a result structured settlements became popular. For o
However, sometimes the annuitant’s needs change requiring access to their future payments sooner than planned. In order to protect their rights, forty-eight states and the federal government have enacted consumer protection statutes establishing specific conditions regarding the sale of future annuity payments. Under the federal law, court oversight and approval is required for individuals choosing to sell structured settlement payments to a third-party. The statutes vary by state but they’re designed to protect the interest of all the parties involved especially the seller.
- Ritchie, A. (n.d.). Selling Your Structured Settlement & Annuity Payments. Retrieved from https://www.annuity.org/selling-payments/
- What are the best ways to sell an annuity? | Investopedia. (2015, August 27). Retrieved from http://www.investopedia.com/ask/answers/082715/what-are-best-ways-sell-annuity.asp