Annuity payments are usually a safe and dependable source of income, especially in retirement. But sometimes, selling those payments can provide access to your cash when you need it most.
Whether you’re facing unexpected hardships, major life events or other financial constraints, understanding why people sell annuity payments and the process involved can help you make an informed decision.
Selling annuity payments: What does it mean?
An annuity is a life insurance product. You pay money to an insurance company now, and they promise to give you regular payments later. When you sell your annuity, you give up the rights to those future payments for a lump sum of cash now.
However, you won’t sell your payments back to the insurance company. Instead, a third-party company, known as a factoring company, will offer you a lump sum of money in exchange for your future payments. You can sell your entire annuity or pick a specific number of payments to sell.
4 common reasons for selling annuity payments
An annuity can provide peace of mind in retirement, but sometimes, a lump sum of cash offers much-needed flexibility.
Many people sell their annuity to address specific financial needs. Whether it’s a major debt or a sudden financial emergency, selling your annuity can give you the money you need to move forward.
While selling an annuity can be a lifeline, it’s usually a complicated and expensive process. Other options, like withdrawing early or taking out a personal loan, might be cheaper. Selling payments is a last resort option for most people.
With that in mind, here are four common reasons for selling an annuity.
1. Unexpected hardship
Life is unpredictable, and sometimes, unexpected hardships can wreck your finances. Selling your annuity can be helpful if your financial situation changes quickly and you need fast access to cash.
For example, if your mom needs nursing home care and you’re responsible for the cost, or if your wife suddenly passes away and your retirement plans are disrupted, selling annuity payments can provide some flexibility and breathing room during a stressful time.
2. Losing your job
Job loss can be a devastating event, especially when retirement is right around the corner. You have less time to rebuild your savings and find a new position, which can make it tougher to recover financially.
Selling annuity payments can help keep your finances on track as you pin down your next job opportunity. It can also help prevent bills from stacking up while avoiding running up debt on your credit cards.
3. Going through a divorce
Divorce is a tough time, both emotionally and financially. Selling annuity payments can help divide assets fairly and keep you financially stable.
When people get divorced, they sometimes have to sell their annuity payments because the contract is owned by both people. Or, one person might sell to avoid going bankrupt.
4. Medical emergencies
As we age, the likelihood of high medical expenses increases. Similarly, chronic illness or disability can force you to miss work or reduce your hours, leading to a loss of income.
If you’re unable to cover medical bills through insurance or other means, selling your payments may keep you out of debt. But even with health insurance, medical emergencies can lead to major out-of-pocket costs and quickly deplete your savings. Selling an annuity can help you knock out medical debt, cover ongoing health costs or even make necessary home modifications.
How to sell your annuity payments
If you’ve decided to sell your annuity payments, here are the general steps you’ll need to follow:
- Speak with a financial advisor: A financial advisor can help you assess your situation and determine if selling annuity payments is a good idea. They can also provide unbiased guidance on potential financial implications and alternative options.
- Find a company to work with: There are several companies that specialize in buying annuity payments. Research different factoring companies to compare their offers and fees.
- Review your cash quotes: Once you’ve selected a company, you’ll receive a cash quote based on the terms of your annuity. Carefully review this quote and make sure you understand the terms and conditions.
- Choose a deal and sign the contract: If you’re satisfied with the offer, you’ll need to sign a contract to finalize the sale.
- Receive your money: Once the contract is signed, you should receive the agreed-upon lump sum payment within about four weeks.
Need an advisor?
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Downsides of selling your annuity payments
When you sell an annuity, the buyer isn’t giving you the full value of those future payments. They’re buying it at a discount to make a profit. There are also sales fees and sometimes legal fees involved.
Taxes are another consideration. The cash you receive is considered income, so you’ll owe taxes on it — and a large lump sum distribution could push you into a higher tax bracket.
You might also face surrender charges from the insurance company for selling payments. And if you’re under 59.5, you might owe a 10 percent IRS penalty meant to discourage early withdrawals.
In short, selling annuity payments is an expensive way to access your money.
Instead of selling, you might consider withdrawing from your annuity. This involves accessing your own money, not exchanging assets with a factoring company.
You also might be able to make penalty-free withdrawals up to a certain amount each year. Similarly, some annuity contracts include a feature called a crisis waiver, which can temporarily suspend surrender charges in specific circumstances, such as a terminal illness diagnosis or needing long-term care in a nursing home. Check your contract for details.
Another option is surrendering payments. You’ll face surrender charges and penalties, especially if you’re within the first seven to 10 years of your contract, but it’s generally an easier process than selling payments. You’ll also avoid the discount rate applied by factoring companies, which reduces how much money you actually receive.
Bottom line
If you need quick access to cash and are comfortable with the potential downsides, selling annuity payments can be a lifeline if you’re struggling to make ends meet. However, it’s always wise to consult with a financial advisor first. Remember, selling annuity payments is considered a measure of last resort for most people. Make sure the sacrifice of giving up long-term income is worth it.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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