Need Cash Now?
Annuities provide a reliable stream of cash over a period of time. But sometimes, life gets in the way of the best laid plans, and you need more cash now. Withdrawing the money ahead of schedule usually carries big penalties. But you can get more money for your annuity by selling the future payments on the secondary market.
Situations in which an annuity holder might want to sell include:
- Job loss
- Medical emergency
- Lifestyle change
- Large purchase
- Annuity inheritance
When Annuities Can’t Be Sold
Some annuities don’t qualify for sale. These include annuities that are in a tax-qualified retirement plans. Also, “straight life” annuities, which pay until death, but no more. These can’t be sold because the number of payments is not guaranteed.
How to Sell an Annuity
Withdrawing funds early from an annuity can come with significant penalties, and usually is not worth the cost. But if you need cash now, you can avoid those penalties by selling your annuity on the secondary market.
Rather than waiting years to receive their payments, some people choose to sell their long-term investment. There’s a short but set process for doing this.
- Research Annuity Purchasers– Start by shopping around for the right annuity buyer. Trustworthy annuity purchasers, or factoring companies, will have positive reviews, offer free quotes and avoid high-pressure sales tactics. Make sure you practice due diligence and become educated so that you are not the victim of an unethical company that preys on uneducated sellers. You can find annuity purchasers through insurance agents and annuity brokers who connect buyers and sellers.
- Get a Quote – Your quote should have a low interest rate so you get to keep as much of your money as possible. The average discount rate is 12 percent. The current value of your annuity depends on certain factors like the size and frequency of your payments. If you receive a fair offer that satisfies your financial goals, proceed with the sale.
- Submit Your Paperwork – Once you receive a quote, you must complete paperwork in order for annuity buyers to collect information from your annuity contract. This information helps to explain the terms of your future payments. Other paperwork you’ll need to provide includes identification, tax forms and a contractual document. In some cases, you may be eligible to receive a cash advance.
- Present Your Case Before a Judge – Selling your annuity is a legal process, so the last step involves a brief hearing to obtain court approval of your transfer. Federal and state laws have this safeguard in place to ensure all the details of your transaction are fully disclosed and to make sure the sale is in your best interests.
Between each of these steps, an attorney will handle paperwork and details, including drawing up the agreement and securing a court date. Once the sale is approved, you will receive a lump sum of structured settlement cash.
Choosing an Option: Partial Sale vs Lump-Sum Sale
When it comes to selling your annuity, there are a few options available: you can sell the whole thing, called an entirety sale, or you can sell the right to some of your future payments. If you do not want to sell your annuity in its entirety, there are also ways to sell part of your annuity:
- Partial Sale– A partial annuity sale allows you to sell a period of your annuity payments for a lump sum of cash. For example, you can sell the first three years of your annuity payments in exchange for money you want for a down payment on a new home. For that time period, your payments will stop. Once the three years have passed, you will begin receiving regular payments. You may also elect to sell a portion of your annuity payments. For example, if your payments are $1,000 a month, you may sell half or $500 a month, and continue to receive the rest of the payments.
- Lump-Sum Sale – Similar to a partial sale, a lump-sum sale allows you to sell a specific number of your payments in exchange for a specific amount of cash. This option also guarantees a payout stream at a later date, but the lump sum amount is deducted from future payments.
For the partial and lump-sum options, some cash remains in the annuity. If at a later date you encounter another circumstance where you cannot wait for scheduled payments, you can contact the funding company to sell remaining payments. These flexible selling options allow you to tailor the transaction to your needs.
Implications of Withdrawing Your Annuity
Your financial needs can change in an instant and may cause you to reevaluate your need for an annuity. That specifically applies in cases of medical or financial emergencies and new business opportunities. However, early withdrawals can come with expensive tax implications and surrender fees.
Insurance companies charge these fees to make up for their losses. These fees usually apply in the early years of the annuity contract. In addition, you will have to pay a 10 percent early withdrawal fee if you are younger than 59½ years old at the time of the transaction.
Inflation May Devalue Annuities
If you are set to receive $1,500 a month through periodic payments, that may be enough to cover all major expenses including rent, groceries and miscellaneous fees. However, if inflation increases your cost of living, the $1,500 monthly payment you’ve been receiving may no longer be enough to support your living costs.
Selling part or all of your annuity is one way to skirt the depreciating qualities of inflation. This provides flexibility and immediate access to a large sum of money that you can invest in other financial vehicles or use to pay off long-term debt.
Why You’re Not Receiving The Full Value
When someone purchases your future payments, you won’t get a dollar-for-dollar amount. Why? Because the overall value of your investment — say, $100,000 — is only worth that amount over a long period of time. Today, its value to buyers is less.
Factoring companies, or companies that will buy your structured settlement, use discount rates to account for this discrepancy in value and make a small profit for giving you cash up front. This discount rate comes out of how much you will get for selling your annuity payments. For example, if you wanted to sell annuity payments worth $10,000 and the factoring company has a 10 percent discount rate, you will receive $9,000 in cash.
Factoring companies calculate the discount using variables that are always moving. Those include:
- Current demand for purchasing payments
- Impact of interest changes and inflation on payments
- Time investment the buyer puts in while waiting for payments
- Value of providing upfront capital
Alternatives to Selling Your Entire Annuity
In addition to selling your annuity before it reaches the disbursement period, you may also be able to sell part of your annuity before you receive it. This is called pre-settlement funding.
You may want to pursue a settlement advance if your lawsuit is taking months, you’ve lost wages and are struggling to pay the bills before your case is settled.
We recommend you have an accountant or attorney look over the pre-settlement funding documents before you sign on the dotted line.
If you need cash now and you’ve already sold your annuity in its entirety, you may also want to consider selling other financial assets like mortgage notes. Private mortgage notes are an excellent way to sell your home or property and get a supplementary monthly income. However, these long-term commitments can prohibit you from realizing other investment opportunities or paying off expensive debt.