The Process of Selling Annuities
- Research Annuity Buyers & Get Quotes: There are many factoring companies that buy annuities, so careful research is a must to choose the best offer. Shop around and get quotes from different annuity buyers before deciding.
- Compare & Accept Best Quote: Compare quotes and potentially accept the offer of a buyer that has given you the best deal while also demonstrating credibility, professionalism, and transparency. Remember to consider both the lump sum amount as well as any fees that you may be charged.
- Complete Paperwork: To complete the transaction and receive your money, you need to fill out some basic paperwork. This will be provided by the buyer, and they can provide support if you have any questions. Once the paperwork is finished, submit it to the annuity buyer.
- Standing Before the Judge: The annuity buyer will then arrange a court date. Court approval is required before you can cash out your payments. Presenting your case before the judge is not difficult. You typically just need to provide a brief explanation of why you need to sell your annuity payments. This step is only required for the sale of structured settlements, such as personal injury annuities in which you were the injured party and lottery annuities.
- Receive Payment: After the judge approves the sale transaction, you’ll receive your money.
The entire process for selling a personal injury annuity takes between one to three months because of that extra step requiring approval from a judge. If your annuity is not from a personal injury lawsuit, the sales process could take just a month. The annuity buyer should help expedite the process by taking you through each step, but it’s impossible to determine an exact timeline of when you’ll receive your lump sum payout.
Know Your Selling Options: Full and Partial
One of the biggest misconceptions regarding selling an annuity is that you must sell all future payments. However, there are several options for selling annuity payments and it’s important to choose the right one for your financial needs.
A full sale of your future annuity payments will result in a larger lump sum payment with no future installment payments.
A partial sale allows you to receive a lump sum of money for a portion of your annuity payments. After the period of annuity payments that you’ve sold passes, you’ll resume receiving the remaining periodic payments.
A third option is to sell just a portion of a specific number of payments. You’ll receive a lump sum, then receive the remaining portion of your annuity payments, so you get both a bulk sum of money as well as ongoing payments.
Sometimes annuity owners feel more secure selling only a portion of their annuity because they know they will still have future payments they can depend on.
Pay Attention to the Discount Rate
When selling an annuity, the discount rate determines how much cash you receive in return for future payments. It’s essentially a fee that is subtracted from the annuity amount you plan to sell. The discount rate depends primarily on the buyer’s expectations of future interest rates. The annuity buyer will use the discount rate to calculate the present value of your annuity—the amount they’re willing to pay you. Other factors affecting the present value of an annuity include:
- The dates the payments are due
- The number of payments that are due to you
- The amount of each payment
The higher the discount rate percentage, the less money you will receive out of your full annuity contract. This is the reason you must compare quotes to ensure you are getting a fair discount rate.
In most cases, you can expect the discount rate to range between 9% and 18%, but it can be higher.
It is important to work with a firm who will share detailed discount rate information with you. The entire transaction should be as transparent as possible. If the rate is too high, consider comparison shopping. Make sure you don’t rush the process as that could end up costing you money.
Why People Sell Annuities
These are some of the most common reasons to sell annuities:
Pay medical bills
Pay off debt
Fund higher education
Purchase a home
Buy a car
Start a business
Invest for retirement
Pros and Cons of Selling Annuity Payments
- Instead of waiting years, you’ll receive your money within weeks or months.
- Ability to immediately pay off debts and reduce financial stress.
- Potential to make a big purchase like a new home or car.
- Pay for your own or your child’s education.
- Invest money for a higher return.
- The discount rate reduces the total amount of money you’d receive from the annuity over time.
- Reduces your long-term financial security if selling the entire annuity contract.
- Possibility of making poor financial decisions with the funds received.
Although some people determine the benefits of selling their annuity payments significantly outweigh the costs, carefully consider both pros and cons when making a choice. This will help you make the right decision for your financial situation.
Tax Implications of Selling Your Annuity
You are not required to pay income tax on any personal injury settlement annuity. If the annuity resulted from a favorable lawsuit verdict, selling that annuity will usually not create any tax consequences.
Investment annuities from insurance companies, on the other hand, are subject to federal and potentially state income tax. You’ll have ordinary income equal to the sale price minus what you invested into the annuity. Also, if you bought the annuity with pretax dollars—through an IRA or a 401(k)—those dollars will be subject to tax when you sell.
Is there a difference between a structured settlement and an annuity?
There is often confusion between these two. An annuity is purchased while a structured settlement is usually awarded due to a personal injury lawsuit.
Are there advantages to owning annuity contracts?
Purchasing an annuity allows you to invest your money in a potentially tax-favorable way. There is also no annual limit on the amount or number of contributions you make to the account. Investing into an annuity can often result in tax-deferred growth.
Who buys annuities?
Factoring companies like DRB Capital, Fairfield Funding, and CBC Settlement Funding will purchase all or part of your annuity payments, giving you the money you need quickly. However, a judge must approve the transaction when it’s a structured settlement. Be aware that a discount rate will apply and the lump sum payment will be less than the full value of the annuity contract.
Why does a judge need to approve the sale of structured settlements?
The laws requiring judge approval of structured settlement sales aim to protect individuals selling their future annuity payments from blatantly unfair deals.
Should I sell my annuity payments?
There are many good reasons for selling an annuity. Sometimes financial needs arise which cannot be delayed. The following are some scenarios in which selling future payments warrant consideration:
- Paying medical bills
- Paying off debt
- Purchasing a home
- Funding a college education
However, whether it makes sense to sell your annuity depends on your specific financial situation.
How much money will I get for selling my annuity?
Annuity buyers will tell you what they’re willing to pay when you request a quote. Not all buyers are equal – and the offer will depend on the buyer’s discount rate. Therefore, it is important that you shop around and compare offers.
What annuities can’t be sold?
Some annuity types can’t be sold. These include:
- 401(k) distributions
- Child support payments
- Disability payments
- Worker’s compensation payments
- Pension plans
- Veteran’s benefits
What is the present value of an annuity?
The present value of an annuity is the current value of all future payments based on a given discount rate. The nominal dollar sum of the remaining payments will always exceed the present value.
Is there a penalty when selling annuities?
Apart from regular taxes, you’ll incur a 10% tax penalty if you sell annuity payments purchased through a retirement account before age 59 ½.
This is separate from any surrender fee in your annuity contract, which is a fee you must pay if you take money from an annuity before the surrender period expires.
What are the most common types of annuities?
Annuity types include:
The type of annuity impacts when you receive cash and the rate of return.
Now that you understand the process of selling annuities and the options available, you can make a more informed decision for both your immediate and future financial needs.