An annuity, a tax deferred investment product sold by insurance companies, is useful to people who have concerns about securing their future. Most people prefer investing in retirement plans like 401(k), traditional IRA, Roth IRA, and Roth 401(k). However, most retirement plans have some constraints on income ceiling, contribution limits, or withdrawals.
An annuity, on the other hand, does not have any limits on contribution. There are no income limits or mandatory withdrawals. Hence, an annuity is desirable for a person who despite having contributed to various retirement plans feels the need for a regular stream of payments of a fixed or a variable nature. In fact, a deferred annuity, that provides a regular stream of payments on retirement, is the most popular annuity.
Reasons for Selling Annuities
A person can sell owned and inherited annuities. Structured settlement annuities, that are compensations for personal injury, medical malpractice, and lawsuits, can also be sold. Despite wanting to save for retirement, a person may have compelling reasons for selling his annuity.
Generally, lack of funds to build a house, finance a child's education, pay medical bills, or to start a business may be the popular reasons for wanting to sell the annuity. Some people may feel that payments received in the future can be better utilized at the present time. Since annuity payments are tax deferred, many people may prefer selling their annuity if they feel that on retirement, they would fall under a much higher tax bracket than anticipated.
Generally, annuities that are held for a long period of time are worthwhile investments. Sometimes a person may buy an annuity just a few years before retirement. The benefits of such an investment do not justify the cost of the investment. Hence, the person may choose to sell his annuity and invest his money in a short term high return investment.
In fact, people investing in variable annuities may be better off managing their portfolio of securities in order to ensure a better return on investment. This is because variable annuities, unlike fixed ones, do not guarantee a fixed stream of payment. The payments received, depend on a person's ability to put together a good portfolio of securities.
Determinants of Selling Annuities
Determine the Worth of the Annuity
The first step before trying to sell an annuity is to find the discounted value of future cash flows in order to determine the present value of the annuity. This is the price that one should receive on selling the annuity. In case the market price of the annuity is less than the present value, selling it is not a sensible decision. It would behoove the investor to hold on to the product till the market valuation justifies the sale.
Determine How Much to Sell
The biggest advantage, that a secondary market for annuities has to offer, is the ability to sell a portion of the annuity payments, while retaining the rest. For instance, a person may sell 3/4th of his monthly payments for five years and get a lump sum amount.
Contact a Buyer
A reputable financial company can determine the fair value of the annuity payments. The company can also inform the person about the necessary documents like: the annuity policy documents, recent copy of the annuity checks - if it is in the payout stage, tax returns, and other necessary documents. However, the company will charge a fee for the services rendered. Direct selling eliminates the middleman and saves fees on the transaction, but makes the process of selling, cumbersome.
In case a person is unable to sell the annuity for a reasonable price, he can always consider an annuity swap that helps him exchange an unfavorable series of payments for a more suitable one. For instance, one can exchange one's variable annuity payments for fixed payments by entering into a swap. One may also consider using the annuity as a collateral in case one needs finances, but is unable to sell off the annuity at a reasonable price.