Understanding the Different Types of Annuities and Selling Options
Having a guaranteed income for the rest of your life is a great benefit. Of course no one wants to outlive their money. We all want to be getting an income even after we retire. That is why it is very important to dedicate a portion of your income towards securing your long-term future. One of the best ways to invest towards securing your life after retirement is through purchasing an annuity.
What is an annuity?
Simply put, an annuity is a contract between you and an insurance company whereby you are insured against “living too long”. The insurance company, which is the annuity provider, promises you a certain monthly payout after a certain period in return for the sum of money you save with the company.
Annuities are perfect for retirees or pre-retirees who want to avoid worrying about bearish markets during their retirement. Having an annuity gives them a specific guaranteed income whether the markets rise or fall.
What are the different types of annuities?
These investments pay a guaranteed rate of interest and you have the option to either defer your income or draw it immediately. These fixed interest investments are attractive to people who want an investment that is modest and with no extra costs.
With variable annuities, investors are allowed to pick from a variety of mutual funds. The performance of those mutual funds (sub accounts) determines the account value. You can also purchase a rider that gives you a specific guaranteed income stream no matter how the market performs.
Here payments are delayed until a specified future date (over one year). They enable you to increase your income stream later for less money as the insurance company is not liable to pay as long as payments are deferred.
These mirror a typical life insurance policy. The investor gives a lump sum to the insurance company in return for guaranteed income payments for a specific period of time or until death. The payments typically start between one and 12 months after the investment is received.
These are fixed annuities that have a rate of interest added to the contract value. The rate of interest is variable and is dependent upon a specific market index being positive. This means that in addition to a guaranteed income, you have a chance of an upside in the principal that is pegged on a market index.
Can I sell my annuity payments?
Sometimes in life circumstances change. Incomes drop or unexpected life changes that demand urgent attention occur. Fortunately, you don’t have to be stuck with the annuity payments if they weigh too heavily on you. Selling annuity payments for a lump sum is an option available when looking for immediate cash payment.
Why do people sell their annuity payments?
Although circumstances are unique foe every individual, here are some of the most common reasons why one would decide to sell his or her annuity payments:
- When the initial reason for buying the annuity investment no longer applies
- When there is a sudden life change which calls for additional cash now
- When one inherits an annuity and prefers to cash in rather than continue paying
- When one wants to pay off a debt using the lump sum
- When you need a down payment for a new home and selling annuity payments is your only option
- When you spot a business opportunity that you want to invest in.
What are my annuity selling options?
When selling your annuity payments, there are the two main options available to you:
In a partial sale, you dispose of your pending settlements in exchange for immediate cash. The mount is determined after a discount rate is factored in. Also, you continue to receive periodic annuities due to the value that remains unsold.
When in a serious financial crunch, cashing in on your annuities may end up being your only option. Here the annuities are transformed into immediate cash as specified in the terms of the contract agreement between you and the buyer.
What are the pros and cons of selling annuity payments?
Taking advantage of a business opportunity
When you spot a business opportunity and don’t have the necessary capital available. The future income of the business you invest in replaces the structured settlements that you opt to liquidate.
Clearing off debts
Debts with heavy interest rates only negate the benefits of your annuity. It makes absolutely no sense to incur heavy interest charges while waiting for your annuity payments. Selling your annuity makes perfect sense in such a case.
It is very seldom that you get your full value once you decide to cash in on your annuity payments. You sell them at a discount. The discount can be as high as 14%. This means you will end up with an amount that is less than what you would receive if you chose to wait out for the annuity payments.
You may need the services of a broker when selling annuity payments. However that great deal would mean paying the broker a fee.