An annuity is an insurance contract you can use to create an income stream. You can purchase an annuity to draw payments against in retirement as a supplement to tax-advantaged or taxable savings accounts. But what if you want to sell your annuity and get immediate cash? Here’s why selling your annuity is something you might consider.
Consider working with a financial advisor as you consider how to increase your cash flow in retirement.
Why Sell Your Annuity?
Selling your annuity lets you trade future payments for immediate cash. There are several reasons for selling your annuity. Here are some of the most common:
- Inflation is shrinking the purchasing power of your annuity payments.
- You need the money to pay for education costs for yourself or your child.
- Selling would allow you to pay off high-interest debt.
- An unexpected life change, such as a divorce or the death of a spouse, means you have immediate needs.
- You’re buying a home or renovating the one you own.
- One of your children is getting married or buying a home and you want to help with the costs.
- You need money for business growth.
- You’re covering your retirement travel plans with a cash cushion.
- You inherited an annuity and you need money to cover burial or other final expenses.
- You’re covering significant medical bills from a serious illness or injury.
- You lose your job and can’t find a new one.
- You’d rather invest the money directly in the stock market.
You may have an entirely different reason for wanting to sell your annuity but the end result is the same: trading annuity payments for a lump sum of cash.
That’s the biggest advantage of selling an annuity. You can get money without having to take out a 401(k) loan, drain your IRA, or liquidate your savings account. The downside is that you reduce some or all of your future income from the annuity, depending on how you choose to sell it.
How Selling Your Annuity for Cash Works
There are three ways you can sell your annuity: A partial sale, a sale in its entirety or lump sum sales. Here’s how they compare.
Partial Annuity Sale
This sells your payments from the annuity for a set period of time. For example, say your annuity that covers you for life and you’re 40 years old. You can sell payments for five years. Once that five-year period ends, you’ll continue receiving periodic payments from the annuity.
The upside of this option is that you aren’t sacrificing your annuity payments permanently. Instead, you’re putting them on hold temporarily in exchange for immediate cash. You can meet your current financial needs and still get money from the annuity once you’re ready to retire.
Lump Sum Sale
A lump sum sale is similar to a partial sale. In the same vein, you can still receive payments from the annuity at a future date. However, instead of selling your annuity payments for a set period of time, you’re selling a lump sum of the annuity payout you’re entitled to receive. So if you need $50,000 to start a business, for example, you could perform a lump sum sale of that amount of benefits.
This option gives you more control over how much cash you receive and what’s paid out from the annuity. With a partial sale, the payout amount may be less exact, depending on the number of payments you forgo. A lump sum sale assigns an exact dollar amount that you want to receive in cash.
Lastly, selling an annuity in its entirety means you give up your remaining interest in the contract. Consequently, you get all of the money that’s left to be paid from the contract in one go, with no future payments. This can be the easiest way to sell your annuity, because there’s no negotiating lump sum amounts or a partial payment term.
Choosing the right option depends on your current and future cash needs. If you have enough money saved for retirement, for example, then an entirety sale could pay forf other financial goals. But if you got a late start on saving, then a lump sum or partial sale could maintain your annuity income stream once you retire.
How to Sell Your Annuity
Selling an annuity is a legal process. Therefore, there are certain steps you need to take to do it correctly.
Firstly, you may want talk to your financial advisor about whether selling an annuity is the right move and which sale option is best. Secondly, you’ll need to research companies that buy annuities for cash.
There are a number of companies that purchase annuities and structured settlements. What you want to consider when comparing them is how much value they’ll give you for your annuity. Typically, you’ll receive between 60% and 80% of what the annuity is worth in cash, although some companies may offer more or less. Taking time to shop around ensures that you get the best deal possible. Reputable companies should be able to give you quotes or estimates free of charge.
Once you get quotes, you can sell your annuity to a settlement company. At this point, you’ll have to complete paperwork related to the sale and schedule a court date for a hearing. Only a judge can approve the sale of an annuity. You can use the attorney provided by the settlement company or choose your own to represent you.
Assuming the hearing goes smoothly, the process ends with you receiving payment. You can then use the cash as you see fit.
Annuity Sale Caveats
There are a couple of cautions to keep in mind. Firstly, you may face tax consequences for selling your annuity. If a structured settlement is not taxable when you receive it, then it generally retains its tax-advantaged status when you sell. But if annuity payments are subject to ordinary income tax when you receive them, as would be the case with a guaranteed income annuity for retirement, then you’d owe as much income tax on the cash as you would a regular distribution.
Secondly, if you’ve received structured payments from a divorce settlement, child support, 401(k) distributions, veteran’s benefits or Social Security, you can’t sell those payments for cash.
The Bottom Line
Selling an annuity can put money in your bank account quickly. But it can be a complicated process.
It’s important to look at the immediate benefits of selling versus any long-term implications if you’re trading off future income. Researching what your annuity is worth and how much cash you could receive can help with your decision-making.
- If you sell your annuity, that’s just one way to generate income for retirement. If you’re looking into fixed or indexed annuities, consider talking to an annuity expert or financial advisor to learn more about how they work. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Compare selling an annuity to other options for getting cash. For example, you may be able to take out a 401(k) loan instead or withdraw money from an IRA for education expenses or the purchase of a first home penalty-free. You may, however, still have to pay income tax on early IRA withdrawals. Looking at all the possibilities can help you determine which one is best for increasing cash flow without throwing your financial plan off-course.