Annuities can be a great source of regular, reliable income during your retirement years. However, if you find yourself in financial trouble, you may consider selling your annuity. Like any investment decision, the decision to sell your annuity should be made after careful consideration of your situation and consultation with your financial advisors to avoid any financial mistakes.
Types of Annuity Buyouts
An annuity is an investment plan in which you pay into an account every month over several years’ time, then begin receiving yearly payments in your later years. Annuities can be sold in part, in a lump sum sale, or sold in their entirety. The right option for you depends on your financial situation and whether you still need to receive any future payments from your annuity.
Partial: With a partial annuity sale, you can sell a portion of your annuity payments without sacrificing the tax benefits of an annuity, and still receive periodic income from your annuity in the future. Partial sales usually make the most sense if you need cash to cover a specific need. You can choose to sell a portion of your annual payments at once. For example, you might sell the first three years of your annuity payments to pay for major home repairs. You will receive a check for those three payments at the time of the sale, and after those three years have passed, your annuity checks will resume. You can sell a portion of your annuity payments more than once, so if you find yourself needing a sum of cash again in the future, you can repeat the process.
Lump Sum: A lump sum sale is similar to a partial sale, but instead of selling specific payments, you sell a portion of the overall value of your annuity. For instance, if you need $25,000 for a new car, you can sell $25,000 of your annuity’s value. You’ll still receive periodic payments for the specified number of years you would have received before selling a lump sum, but your annual payment amounts will all be considerably smaller.
Entirety: If you sell the entirety of your annuity payments, you may receive a larger payment than if you sell a partial or lump sum amount. However, you will lose your investment with no future periodic payments and no death benefit for your heirs.
What is Your Annuity Worth?
If you sell all or part of your annuity, the factoring company that purchases it will try to make the biggest profit it can. The difference between the value of your annuity and what you actually receive when you sell it is called the discount rate. The lower the discount rate, the better for you.
You can negotiate with the factoring company to try to reduce the discount rate. The average discount rate is 12 percent but can be as low as 50 percent. That means if you have an annuity valued at $100,000 and you are selling it in its entirety, you can expect to be offered an average of $88,000 or as low as $50,000.
Various factors influence how much of a discount rate the factoring company will offer, including:
- Whether you are selling the annuity in its entirety or a partial or lump sum amount.
- The total number of payments you are selling and their total value.
- Current economic conditions (since an annuity is an investment and payments can vary based on stock market conditions, better economic conditions are likely to land you a higher sale price for your annuity).
- Interest rates, fees, and other charges.
Who Buys Annuities?
Companies that buy annuities are called factoring companies. While there are many reputable factoring companies, others exist simply to make a buck and will not hesitate to offer you a poor deal to take advantage of your economic hardship. Look for a reputable company that has been around for a long time. Ideally, your factoring company should:
- Never use high-pressure sales tactics, including limited time offers.
- Have helpful sales representatives who take the time to explain the process to you.
- Offer cash advances.
- Offer a low discount rate.
- Encourage you to get other quotes from their competitors.
- Offer to let you review all of the paperwork with your attorney or financial advisor before signing.
How to Sell Your Annuity: The Process
The process for selling your annuity follows the same basic steps:
Seek guidance: Before selling your annuity, seek help from a trusted financial advisor or attorney. Either one will help you determine if you’re making a decision that will hurt or help your financial future.
Shop quotes: Get quotes from multiple factoring companies or settlement funding companies. They should offer you a risk-free, no obligation quote.
Schedule a court date: You must have a judge’s approval in selling your annuity before getting any payments. The company you hire usually schedules the court date through their attorneys or you can use your own.
How to Make the Most of Your Annuity Sale
These strategies can help you make the most of your annuity sale:
- Talk to your financial advisor.
- Sell as few payments as possible. Calculate how much money you’ll need, and sell as few payments as you can to get that amount.
- Get several quotes from factoring companies. Don’t settle for the first quote you receive. Look for one with the lowest discount rate, and don’t forget to ask about additional fees that might drive up the cost and reduce your profit.
Pros and Cons of Selling Your Annuity
Selling your annuity might be a good option for alleviating debt or paying down a financial hardship but it shouldn’t be a decision taken lightly. Before you sell your annuity, weigh the pros and cons.
–Nearly instant cash: If you need money quickly for any reason, selling your annuity will give you cash quickly. You’ll receive a lump sum within weeks instead of years.
–Pay off debt: Sold annuity payments can help pay off debt, whether that be from an emergency medical procedure, home repair or anything else you may have been unprepared for.
–Multiple options: As mentioned above, you have multiple options when it comes to selling your annuity so you can get money quickly while still investing money for the future.
–Reduced income for the future: Always remember while selling your annuity might help you with immediate financial emergencies, selling it early can affect your long-term investments. In other words, selling and using annuity payments now reduces the number of annuity payments you’ll get later.
–Future payments are being sold at a discount: As we discussed earlier, it’s important to remember you won’t be getting the full amount of your annuity payments. The factoring company takes a percentage.