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May 01, 2006
Selling Annuity Payments for a Lump Sum of Cash
Annuities provide regular cash payments for the future, but what if you need to meet large, unplanned expenses today?
The solution is simple: Sell your annuity payments for immediate cash. You can sell all your annuity payments or only part of the proceeds, depending on your situation. Then instead of waiting to receive small payouts over a lengthy period, you could sell your annuity for a large lump sum of cash that you can spend on anything: debts, a new car or house, college tuition or perhaps a vacation.
Regardless of how you spend the money, you can legally sell your annuity payments to gain instant access to money that is rightfully yours. When you sell an annuity payment, you're essentially selling the right to receive the payout to a third party, such as a broker, bank or individual. Generally, you can sell annuity payments as long as they are guaranteed (even if you die) to be made and can be assigned to another entity.
The Intricacies of Annuities
Before you embark on selling annuity payments, it's important to understand how these investment options actually work. Annuities are created for various reasons, including structured settlements from personal injury agreements, contest winnings, and trust funds. However, annuities commonly involve contracts with insurance companies.
Here’s how insurance annuities work: You buy an annuity and agree to make payments—known as premiums to the insurance company. In exchange, the company agrees to make payments to you at a later time for a specified period. You, the annuitant, might pay your premium in one lump sum or in installments over the course of many years. Regardless, once you’ve finished paying the premium, the company begins distributing your funds.
You can receive your funds in a lump sum payment; however, most annuities provide a series of installments. For example, a life annuity makes payments of regular income for as long as the annuitant lives. Joint and survivor annuities give payouts for the life of the annuitant and a beneficiary, such as a spouse. There are also period certain annuities that make regular payments for a set term, whether or not the annuitant dies.
Also, some life annuities come with a refund option that provides annuitants with a guaranteed income for life and continues the payments to the beneficiaries according to the refund provision. When the annuitant dies, the beneficiaries will receive a refund. This amount will be equal to the difference between the annuity's accumulated value prior to annuitization (payout) and the total benefits received by the annuitant. Another less common payment structure is the fixed amount option. With this alternative, the annuitant chooses the size of the benefit payments, which then determines the length of time over which the benefits are received.
Apart from the various payout options, annuities are either fixed or variable. With traditional fixed annuities, the insurance company invests your premium in its general account. Whatever payout option you select, the interest gains and payment amounts are guaranteed by the insurance company.
With variable annuities as the name indicates—your payout will fluctuate. This is because your premiums buy units in your choice of separate accounts, which then invest in stocks, bonds, and money market funds. The payout will depend on the performance of the underlying securities in the separate accounts in which your premium is invested. You assume the risk involved in investing your premiums in exchange for potentially higher returns.
Important Considerations before Selling Annuity Payments
Whether you have a fixed or variable annuity, there are some important factors you should keep in mind before selling your payments. Selling all or part of your annuity payments not only can satisfy your immediate needs, but it can also help lower your risk against collecting future payments.
But it's important to keep in mind that selling annuity payments will cost you in the form of charges and fees. You will sell at a lower price than the amount owed to you to compensate investors who will be assuming the risk of collecting on your behalf. The following costs may be factored into the transaction:
- Discount rate – This is the rate the purchasing company applies to your future benefit payments to come up with what those payments are worth in today's dollars.
- Profit margins - This amount will vary by company and transaction.
- Commissions – Referral fees are paid to the broker bringing the business to the purchasing company.
Before you make the final decision to sell annuity payments, there are several alternatives you can consider to obtain access to cash. Check into waivers that would allow you to tap your annuity funds without a tax penalty. Some annuity contracts, but not many, contain waivers that allow you access to some or all of your money in the event of disability, nursing home confinement, or terminal illness. If you have a variable annuity, you could change your fund allocation to boost distributions from your investment accounts. Or you could roll your variable annuity into an immediate annuity. However, switching to this type of annuity could ultimately result in higher fees.
Once you decided selling annuity payments is right for you, there are plenty of companies that can assist you with the transaction. They can assess your needs and determine a solution that best fits your situation. Sovereign Funding Group, for example, is an experienced, reputable company that offers convenient, no-risk services to help with the selling of deferred payments and business financing, including annuity payments.
Posted by dspringer at May 1, 2006 10:57 PM
