No one can make a good financial decision under pressure. This situation is particularly true for someone in financial crisis. A person has a crisis and needs cash to get through it. One possible source of cash is to sell the future payments of an annuity investment. Be careful: This is a huge financial decision that needs to be analyzed carefully.
What is an annuity?
Investopedia defines an annuity as a financial product that is funded with premium payments. An individual can fund an annuity with a lump sum payment, or invest dollars over time. This is referred to as the accumulation stage.
At some point, the individual can decide to annuitize. In this annuitization phase, the annuity owner can receive a stream of payments. An investor can purchase an annuity that makes payments over their entire remaining life. In my view, this is the great benefit of annuity- a stream of income as long as you live.
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Now, like Baskin Robbins, there are 52 flavors of types of annuities (maybe more). You can buy fixed annuities, or variable annuities that include investments in stock and bonds. The focus of this article is the concept of selling annuity payments.
Say you own an annuity and you’re 60 years old. You can annuitize the contract and receive $2,000 a month for the rest of your life. Your life expectancy is 80 years old- another 20 years.$2,000 a month for 20 years is $480,000.
Annuities also have an insurance component. The actuaries at the annuity company are going to use your age, annuity investment and life expectancy to predict how long they will make payments to you. To keep it simple, let’s assume a total payment is $480,000.
An insurance company is making a guarantee that those payments will be made. In fact, insurance companies are judged on how well they manage their liabilities for future annuity payments. Insurance companies receive a credit rating that rates their “claims paying” reliability.
Selling annuity payments
Annuity.org explains the concept of selling annuity payment. Structured settlement companies (annuity buyers) buy the future stream of annuity payments. They allows the annuity owner to receive a lump sum now- in exchange for those future payments. But keep these factors in mind:
• Discounts and fees: The annuity buyer will pay you a discount. After all, they exist to profit from providing this service to annuity sellers. In addition to the discount, you’ll also be charged a fee. The fee covers the legal, administrative and filing costs of the transaction.
• Legal requirements: Annuity owners are protected by the Structured Settlement Protection Act (SSPA). This act requires a judge to sign off on these annuity sales. You’ll have a court hearing- and you’ll need to be represented by an attorney. These rules exist, because of the substantial financial impact to the annuity seller.
• Time value of money impact: Inflation means that future payments are worth less than today’s dollars. A $2,000 payment 10 years from now is worth far less than $2,000 today. The time value of money will reduce the lump sum amount you receive. The longer until the payment is received, the less you’ll receive today.
While you may be under financial pressure, think very carefully before selling your annuity payments. You’re giving up a stream of income that can last as long as you live- what other investment offers those types of guarantees?
Seek out the advice of an attorney and a financial expert. Their feedback can give you some peace of mind.
Has someone you know sold an annuity? I’d love to hear from you.
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