The Process of Selling Annuities
- Research Annuity Buyers & Get Quotes: There are many factoring companies that buy annuities, so careful research is a must in order to choose the best offer. Shop around and get quotes from different annuity buyers before making a decision.
- Compare & Accept Best Quote: Compare quotes and 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, it is submitted 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 personal injury annuities in which you were the injured party.
- Receive Payment: After the judge approves the sale transaction, you’ll receive your money.
Overall, 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 have to sell all future payments. However, there are actually several options for selling annuity payments and it’s important to be aware of them in order 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 payments which they can depend on in the future.
Pay Attention to the Discount Rate
When selling an annuity, the discount rate determines how much cash you will 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 on several factors, including:
- The full amount of your annuity contract
- The dates the payments are due
- The number of payments that are due to you
- The amount of each payment
- Future interest rates
- Economic conditions
- Other fees
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 this information with you. The entire transaction should be as transparent as possible. You are entitled to all the details regarding the discount rate. If the rate is too high, consider comparison shopping until you find a better rate that puts more money in your pocket. Make sure you don’t rush the process as that could end up costing you money.
Why You Should Sell Your Annuity
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 being forced to wait years, you’ll receive your money within a matter of 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 interest yield.
- 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 most people determine the benefits of selling their annuity payments far outweigh the costs, both should be considered when making a choice. The more you weigh the positives and negatives, the better equipped you’ll be to decide.
Tax Implications of Selling Your Annuity
You are not required to pay income tax on any person injury settlement annuity. So if you were the plaintiff in a lawsuit and the annuity was a result of a favorable verdict, that money does not count as income, whether you continue to receive installment payments or opt to sell the annuity for a lump sum.
Investment annuities from insurance companies, on the other hand, are treated as income and are consequently subject to federal and state taxes.
Is there a difference between a structured settlement and an annuity?
There is often a great deal of confusion when it comes to differentiating between these two. While both are financial tools, they are not the same. The main difference between the two is an annuity is purchased while a structured settlement is awarded as a result of a personal injury lawsuit.
Are there advantages to owning annuity contracts?
Purchasing an annuity allows you to invest your money while delaying tax obligations. There is also no annual limit on the amount or number of contributions you make to the account. When your money is invested into an annuity, the amount compounds each year, potentially resulting in a greater financial return compared to other investment options.
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. You have the legal right to cash out your annuity payments to any third-party, but a judge must approve the transaction when it’s a structured settlement. Be aware that a discount rate will be applied 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?
The laws requiring judge approval were put into place to protect individuals selling their future annuity payments to ensure they are not agreeing to an unfair deal.
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 may be considered:
- Paying medical bills
- Paying off debt
- Purchasing a home
- Funding a college education
How much money will I get for selling my annuity?
The amount you receive will be provided once you request a quote from an annuity buyer. Not all buyers are equal – and the offer will depend on the buyer’s discount rate. This is why it is important that you shop around and compare offers.
What annuities can’t be sold?
There are a number of annuity types that 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 can be determined by adding up the value of all remaining future payments. The amount you actually receive, however, depends on the discount rate charged by the annuity buyer.
Is there a penalty when selling annuities?
While there is no penalty for selling annuities, there is a discount rate charged by the company making the purchase. This allows them to cover legal and administrative fees, as well as make a profit. Remember that the buyer is the one receiving a discount on the purchase of your annuity. So the higher the discount rate, the lower your payout will be.
This is different from a surrender fee that may be mentioned 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?
Here are the most common types of annuities you may encounter:
They type of annuity impacts a number of factors, including how much you’ll receive and when.
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.