Selling Annuity Payments For Cash: How To Do It In 5 Steps

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You’ve carefully planned for retirement and secured a steady stream of income with an annuity.

But then life throws a curveball at you. Maybe your dream vacation home goes on the market, an unexpected medical emergency or you need to help a child with a down payment on a house. Suddenly, that guaranteed income feels more restrictive than reliable.

This is where selling your annuity payments comes in. It’s a financial decision that can provide a much-needed lump sum of cash, but it comes at a steep cost.

Selling your annuity payments involves several steps. Let’s break down the process and explore the pros and cons so you can decide if selling may be the right move for you.

1. Speak with a financial advisor

Selling annuity payments can be complicated, so before you get started, it’s wise to get an unbiased professional opinion.

A financial advisor can assess your financial situation, understand your reasons for selling and explore alternative options that might better suit your needs. They can also explain the tax implications and help you navigate the process.

2. Find an annuity company to work with

Research reputable companies specializing in purchasing annuity payments. These third-party businesses are also known as factoring companies.

Look for companies with a good track record, transparent pricing and excellent customer service. Make sure to contact multiple companies to compare quotes and terms.

You can sell your annuity payments without a judge’s signoff so long as your annuity isn’t from a lawsuit settlement. You will need a judge’s approval for structured settlements, though, before money is distributed.

3. Review your cash quotes

Annuity buyers will assess your specific contract details and offer you a cash quote for your payments.

This quote will always be less than what the payments are worth. Carefully review the offer, considering the discount rate and any fees involved. If you’re only selling a portion of your payments, make sure you understand any restrictions on future payments.

4. Choose a deal and sign the papers

Once you’ve chosen a buyer and offer, you’ll receive paperwork outlining the terms of the sale. This will detail the amount you’ll receive, fees and the impact on your remaining annuity payments. Review the contract with your financial advisor before signing.

5. Receive your money

After the paperwork is finalized and approved by the annuity issuer — which can take a few weeks — you’ll receive your lump sum payment. Some companies may offer cash advances to bridge the waiting period.

Why sell your annuity?

There are several reasons why someone might decide to sell their annuity payments. Here’s a breakdown of the advantages and disadvantages to help you decide if it’s right for you.

Pros of selling annuity payments

While income from an annuity provides peace of mind, there are situations where a lump sum can be a game-changer. Here are a few examples of when an influx of cash can be beneficial.

• Medical emergencies: A sudden illness or injury can come with a hefty price tag. Selling a portion of your annuity can help cover out-of-pocket medical expenses or bridge a gap in income if you’re unable to work.
• Unexpected hardship: Maybe your dad was recently admitted to a nursing home, and you’re on the hook for the bill. Or maybe your wife passed away unexpectedly, throwing your retirement plans into chaos. A lump sum of money can make these unexpected challenges easier to deal with.
• Investment opportunities: Perhaps you’ve stumbled upon a promising real estate investment. Selling a portion of your annuity can provide the capital to seize the opportunity.
• Major life events: Helping a child with a down payment on a house, funding a long-awaited wedding or starting a business — a lump sum payout can help make milestones in life a reality.

Cons of selling annuity payments

Selling annuity payments gives you instant access to cash you’d otherwise have to wait years to receive. However, this convenience comes at a cost. Make sure to weigh the downsides of selling payments before making a decision.

• Reduced future income: Selling your annuity payments means giving up a steady source of income in the future. This could be risky, especially if you rely on those payments for essential expenses.
• Lower overall return: The lump sum you receive is discounted compared to the total value of your future payments. This means you’ll never receive the full worth of the annuity payments you sell after fees, taxes and a discount rate are applied.
• Tax implications: You’ll owe income tax on the lump sum you receive — which could mean a hefty bill from the IRS, especially if the windfall pushes you into a higher tax bracket.

Alternatives to selling your annuity payments

Selling your annuity payments isn’t the only way to access cash from your annuity or get out of an annuity. Here are two other alternatives to consider.

• Annuity withdrawal provisions: If the annuity is in the accumulation phase, the insurance company may let you make penalty-free withdrawals from your annuity value each year, usually 10 percent. This can be a good way to access a limited amount of cash without sacrificing the entire annuity or paying exorbitant fees.
• Annuity surrender: This involves surrendering your entire annuity contract in exchange for a lump sum payment from the issuing life insurance company. This option typically comes with significant surrender charges, and may not be available for all types of annuities, such as immediate annuities.

These alternatives may offer more flexibility and potentially lower financial impact than selling your annuity payments outright. Comparing these options with your financial advisor can help you determine the best course of action.

FAQs about selling annuity payments

• How much cash for annuity payments can you get?
  

  The amount of cash you receive will depend on multiple factors, including the type of annuity, your payment schedule and the size of your annuity payments. Also, the longer the payout period remaining on your annuity, the higher the potential lump sum value.

  The discount rate plays a key role in determining the payout you’ll receive. Discount rates run between about 9 and 18 percent. The higher the discount rate, the less money you receive.

  Factoring companies set their own discount rates. The discount reflects the trade-off you make for immediate access to your money. It also allows the purchasing company to make a profit.

  On top of this, selling an annuity can trigger a surrender charge from the issuing life insurance company, further reducing the money you actually receive. Surrender charges usually start at about 7 percent, but can be significantly higher.

  In the end, you can expect to receive between 60 and 80 percent of the cash value of your annuity.

  To maximize the value you receive, compare quotes from multiple annuity buyers. Shop around and find the factoring company offering the most favorable terms so you can minimize the discount rate and maximize your cash payout.

• How soon after selling is the money dispersed?
  

  For traditional annuities, the process typically takes about four weeks. The disbursement timeframe can vary depending on the complexity of your annuity and the buyer’s purchasing process.

  Some companies may offer cash advances to bridge the waiting period, but these often come with additional fees. Factoring companies recoup the advance later from the payout after the sale is finalized.

• What happens after you sell your annuity payments?
  

  Selling your annuity payments is a permanent decision with consequences. Once you’ve sold your payments, you’re responsible for managing the cash you receive wisely. If you sell your entire annuity stream, you won’t receive any future income from the annuity.

  Money from the payout is considered income by the IRS, so you’ll owe income taxes on the entire lump sum when tax time rolls around. Consulting a tax advisor or financial advisor is recommended so you aren’t surprised by a huge tax bill.

  Finally, if you named a beneficiary for your annuity, selling it will impact the amount they receive after you pass away. Or it might eliminate their inheritance entirely, depending on how many payments you sell.

Bottom line

Selling your annuity payments can be a way to free up cash, but it’s a decision that shouldn’t be taken lightly. It’s a very expensive way to access your own money. Carefully weigh the pros and cons, considering your future financial needs and potential tax implications. Speaking with a financial advisor is vital to ensure you understand all your options before making a decision.

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.