From Future Payments to Immediate Capital: Understanding Annuity Sales
An annuity is something intended to pay you slowly, and often people are satisfied with that. But for some people, annuities are problematic because a fixed monthly check doesn't always line up with the financial reality of dealing with unexpected medical bills, roof repairs, or trying to pay off debts with high interest rates. They will often look into selling the payments for a lump sum.
What's Involved?
So let's explore in some more detail how selling an annuity works. In an annuity sale, you transfer the right to some or all future payments to a buyer. Generally, that would be a company that specializes in this kind of buyout. The company pays you a lump sum, and future payments will go to them. The insurer keeps paying on the same schedule, but the recipient on the other end changes.
Cost: such an arrangement is never going to be free. The buyer will work out what your remaining payments are worth today, subtracting a margin to cover its cost of money and to make a profit. The higher the discount rate you're quoted, the lower the lump sum you receive. So why would people accept a financial arrangement that leaves them disadvantaged in the long run?
Why do People Sell?
Generally, it's people who find themselves in the following financial situations:
Paying off high-interest loans or other debts.
Big expenses, such as a down payment, tuition, medical care, or small business expenses.
Preference. Some people might want to have the full amount in their possession instead of relying on monthly payments.
How to Achieve Annuity Freedom
Sellers often describe the result of selling off your annuity as Annuity Freedom, meaning that you have full control of your funds instead of relying on monthly payments. By selling, you're giving up predictability but adding the choice to do with the remaining funds what you see fit. This trade-off makes sense if having that cash available to you is worth more than long-term predictability. Think about which will seem more appealing in ten years' time.
If it's a truly life-changing amount of money to have immediately, then selling your annuity could make sense. But on the other hand, if you lack a compelling reason to sell, selling could prove to be a mistake in the long term.
The Full Cost of Selling
Bear in mind that the discount charged by the buyer is not representative of the full cost of cashing out early. You can expect legal and administrative fees to be added, and in some cases court filing charges. Whenever you're talking to buyers, always communicate in terms of the net amount you'll receive rather than the headline figure. Also, don't forget about taxes, which you may or may not owe depending on the type of annuity, your state of residence and your tax situation.
How the Process Works
The whole point of annuity selling is to get cash quickly, but that doesn't mean the process is rushed. There's more structure than you might expect.
First, request quotes from buyers, who will review factors like payment schedule and the financial situation of the insurer making the annuity payment. Once you accept an offer, the buyer will prepare the transfer documents.
If your payments come from a structured settlement, such as one awarded following an injury claim, you'll probably need a judge's approval. The judge must be satisfied that the deal is in your best interest, so those who don't have a reasonable motivation for cashing their payments may be denied by the legal system.
Other annuity types might only need consent from the insurer. Once everything is approved, the money is released. Generally, the whole process is done in a few weeks.
Protecting Yourself
If you decide to sell your annuity, make sure you protect yourself. Get at least three quotes and ask each buyer to put the discount rate and every fee clearly in writing. You should check that the buyer is licensed, check the complaint history, and be prepared to walk away from anyone who pressures you to decide quickly or won't explain their approach.
Speak to an independent financial advisor who doesn't earn anything from the sale for peace of mind and to make sure your annuity sale is legitimate and in your best interest. Legitimate buyers expect you to take your time, so pushy tactics should be approached with caution.
Selling your annuity involves permanently giving up a steady cash income for instant cash. Whether or not that's worth it is up to you, and sometimes the judge, to decide.
If you're interested in reading more about similar topics, see our other blog posts for more.
