Annuities, undoubtedly, are an excellent vehicle for providing steady, long-term income for retirement or other purposes. Unfortunately, they lock you into an inflexible payment schedule that may not fit your immediate financial needs.
Getting a lump-sum of cash for some or all of your annuity payments, however, can provide an ideal solution to your cash flow problems. There are many reasons why you might need to obtain cash for your annuity payments. Perhaps a recent divorce or death in the family has put a strain on your finances. Or maybe you're facing a large expense such as a home purchase, wedding or college tuition.
Whatever the reason, getting cash for your annuity payments can give you instant access to money that is rightfully yours. It can also provide a hedge against inflation, since the value of these periodic payments will be worth much less in the future. You can cash in annuities established for a variety of purposes, such as insurance, structured settlements from personal injury agreements, lottery/contest winnings, royalty payments and trust funds.
When you opt to get cash for annuity payments, you essentially sell the rights to receive these periodic payouts to a third party. Generally, companies will allow you to obtain cash for annuity payments if the payments are guaranteed to be made whether or not you are alive. As another stipulation, the annuity must allow for assignment of the payments and/or a change in the ownership of the annuity.
Many people are under the impression that it is illegal to receive cash for annuity payments without court authorization. However, payments not associated with a settlement do not require such approval to be purchased by a third party. That means you have an unrestricted right to transfer your annuity payout to another individual or company.
Understanding How Annuities Work Derived from the Latin word for "year", an annuity is simply a sum of money payable annually or at other regular intervals. In the context of life insurance, an annuity is a contract between you and an insurance company under which the insurance company pays you money for a stipulated period-often for life.
Here's how they work: The purchaser agrees to pay premiums to the insurance company, in exchange for which the company agrees to make payments at a later time for a specified period. The time during which the premiums are paid is called the "accumulation period". The premium can be paid in one lump sum or in installments over the course of many years. The person receiving the benefit payments, the annuitant, is usually (though not always) the owner of the annuity.
After the accumulation period ends, the company begins distributing funds either in one lump sum or installments paid out usually on a monthly basis. A common payout option involves a life annuity making payments of regular income for as long as the annuitant lives.
Annuities fall into two main categories: fixed and variable. With traditional fixed annuities, the insurance company invests the premium in its general account. Whatever payout option is selected, the interest gains and payment amounts are guaranteed by the insurance company, which assumes the risk of investing the general account.
With variable annuities, however, the premiums buy units in your choice of separate accounts, which then invest in stocks, bonds, and money market funds. The payout will depend on the performance of the underlying securities in the separate accounts in which the premium is invested. Unlike fixed annuities, the value of the account is not guaranteed—annuitants assume the risk involved in investing their premiums in exchange for potentially higher returns.
Fixed and variable annuities are staple items in the investment portfolios of many pension holders. In fact, under government rules, individuals with a personal pension can take up to 25 percent of the value of their funds as a tax-free lump sum when they retire. The remaining 75 percent must be used to provide an income for life through a capital investment such as an annuity.
What to Consider When Getting Cash for Annuity Payments Regardless of the type of annuity you own, there are a variety of brokers and investment firms willing to give you quick cash for your annuity payments. To make your annuity payments attractive to purchasers, they must be sold at a lower price than the total amount owed to you. Generally, you must give at least an interest discount equivalent to bank rates. And many companies require even higher discounts to cover their total risk, costs and profit margin.
Before you elect to obtain cash for your annuity payments, carefully weigh your future return and risks against your immediate financial needs. Better yet, consult with a reputable financial expert such as a financial asset manager or planner about your specific situation. Your financial advisor can conduct a professional evaluation of your obligations, income, assets and risk threshold, and then provide you with the best options to meet your needs.
Receiving cash for your annuity payments can be a practical solution to meeting your immediate cash flow needs.