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Don't want that annuity anymore? You can sell it |
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Sometimes the secondary market pays more money than your annuity issuer would offer. Jane is a 67-year-old retiree with a deferred annuity of $113,000 who immediately needed money for medical bills. However, her insurance company would pay it out over a minimum of five years, at $1,913 per month. Surrendering the policy would net her only $79,600. Based on the present value of the five-year payout option, a secondary investor paid Jane $92,346, nearly $15,000 more than if she had cashed out with her carrier.
Annuity buyers base the price they'll pay you on
the total dollar amount to be distributed, the time period over which the payout
will be made, and the current level of interest rates. Other considerations include
the insurance company's financial-strength rating and particular terms and conditions,
such as whether the policy has a death benefit.
The annuities market is still small compared with
other financial arenas. Besides J.G. Wentworth, the other big firms
in the field are Peachtree Settlement Funding, Stone Tree Capital
and Settlement Funding. Vaughan of J.G. Wentworth says the firm
typically applies a discount rate (the firm's cost of funds plus
the interest rate) of 7 percent to 8 percent on lump-sum purchases.
But some smaller, less scrupulous brokers have charged steeper rates,
as high as 17 percent.
Cautions about secondary market
Because this market is complicated and unregulated, insurance and
financial advisers warn annuity holders to proceed with caution.
"Does the consumer really understand what they're
getting into when they're engaged in this type of transaction,"
asks ACLI spokesman Jack Dolan. "If one settles their policy
for a lump sum, there's always a chance that money will not be available
to cover them at a later date."
Still,
the secondary market is making the insurance industry sit up and take notice,
says Michael Giffin, owner of Giffin Planning Services who sells annuities for
clients. "Insurance companies are offering more options now. Instead of saying,
'You're stuck with $2,000 a month,' now they're saying, 'Let's see what we can
do for you.' The market is evolving." Steps
for selling
If you'd rather be done quickly with your annuity policy, here's
the best way to go about it.
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Steps for selling: | |
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Call
your insurance company first. It may be more flexible
in buying it back. If it's an immediate annuity, find
out if it has any cash value. In many cases, the insurance
company won't provide a lump sum once monthly payments
have started. If it's a deferred annuity, ask if it has
"surrender charges." They could lower the current cash
value or require that payments be taken over a minimum
of five or 10 years to get the full value. |
| • | Contact
your financial adviser. Talk to your financial adviser, insurance agent,
CPA or contact an actuary or annuities broker who can advise you on your choices
and the best offers. Crunch the numbers to see who offers the better deal. Even
if you don't plan to sell at the moment, it's a good idea to know the exact value
of your annuity, just in case. | | • | Consider
how much you need. You don't have to sell your entire payment or the full
term; you can sell a portion and keep the rest. | | • |
Understand
the tax impact. The gain (or loss) from a lump-sum
payout, which is calculated by comparing the proceeds
of the sale to the associated cost basis, is considered
ordinary income by the IRS. If you do plan to keep some
or all of your annuity, remember that it's not very tax-efficient.
Because annuities are considered part of an estate, they
can be taxed at up to 45 percent. |
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