Annuities Defined & Explained

Annuities are insurance products that provide long-term income through a stream of future payments. While investment annuities save money for retirement and beneficiaries, structured settlement annuities stem from personal-injury legal cases, wrongful-death claims or lottery payouts. When unexpected circumstances arise and require immediate funds, you can sell these payments for a lump sum of cash.

There are many benefits to these investment products, which is why people planning for retirement, those who win the lottery and recipients of personal injury structured settlements use annuities most frequently.

Choosing to fund an annuity can be a personal decision. Discuss with your spouse or loved before making this decision. It is also suggested that annuitants consult with an accountant or attorney before making this decision.

Should you have any additional questions about annuities, how they work, and the benefits of either type, the Annuity FAQs page can be a useful and comprehensive resource within your search.

If you believe an annuity would be a good investment for you and your family, there are several easy steps to follow to get one.

There are a variety of brokers, insurance companies and banks that issue annuities. Look at ratings from Fitch, Standard & Poor’s, AM Best and Moody’s to ensure you choose a reputable company.

An annuity is purchased in one of two ways: as a lump sum or with premiums.

Following a lawsuit for a car accident, product defect or workers’ compensation claim, a court will award an annuity meant to provide for the plaintiff’s long-term financial needs.

You’ll learn early on there are several key players involved in the annuity purchasing process: the insurance company that distributes the annuity, you as the annuity owner, your beneficiary, and an annuity buyer, should you choose to sell your annuity.

Insurance companies are annuity issuers. These businesses work with brokers, courts and individual buyers to create individually tailored annuity contracts, providing consumers with savings and investment options. They accept premiums, invest some of the funds, and over time provide annuitants with income through a series of payments.

Individuals or defendants pay premiums to insurance companies. The insurance company stores the money in tax-sheltered, interest-growing accounts. At a scheduled time, the owner of the account (which can be you or someone you assign to receive payments) receives cash in a lump sum or through a stream of payments which, in some cases, last through retirement.

Annuity buyers purchase future annuity payments in exchange for advancing cash. They work as a middleman, navigating between annuitants who need money now and companies scheduled to make payments in the future. This arena for selling payments—made up of annuity owners and buyers—is known as the secondary market.

When the owner of an annuity dies, remaining payments often transfer to a spouse or beneficiary. Every annuity contract includes a different set of rules to determine how many payments, if any, are passed on and who will receive them. Riders can also be purchased to increase the amount inherited. Designating a beneficiary helps to avoid a lengthy probate process and prevents remaining assets from being forfeited to an insurance company.

There are a number of annuity options available to fit your financial needs, all of which have different benefits and functions. We can provide you with an in-depth look at how annuities work, the various types of annuities available to fit your financial needs, and how to sell your annuity payments in the event you need immediate access to cash. Continue reading for a peek at each annuity topic.

In addition, if you are grappling with the idea of buying or selling your annuity investment, but are unsure of the process, we can help to guide you on your financial journey.

Annuities can be useful in the right circumstances. You should be aware of all their available benefits, as well as their risks and drawbacks.

Annuity owners pay an insurance company regular premium payments or a one-time lump sum in exchange for steady income payments that can last for the rest of their life or a fixed amount of years. For example, a $100,000 annuity can provide an annuitant with about $630 monthly, or about $7,600 yearly. Unlike a 401(k) or IRA, there is no limit to the amount you may put into an annuity.

Insurers will work one-on-one with you to set up a schedule tailored to your individual needs. If you want income immediately, plan for payments to start in a matter of months. However, if funds are withdrawn before the age of 59 ½, you will be subject to a 10 percent penalty tax or early withdrawal fee. If you want income once retirement begins, you can initiate payments decades after purchasing. In exchange for securing your finances, you can incur penalties or fees when trying to deduct funds early.

While purchasing an annuity may have been a profitable financial option initially, needs can change over time. In addition to investing in this financial vehicle, annuities can be split and sold.

It is not uncommon for annuities to be shared or jointly owned between two parties. But just as they can be shared, annuities can also be split. This is a common option for divorcing couples, as they choose to split their remaining financial assets and marital property. Splitting an annuity is a complicated process that requires the original annuity contract to be split evenly into two new, identical contracts.

If buying or splitting an annuity are not ideal options for you, there is also the decision to sell your annuity. In the event that you need cash now, you can sell a portion or all of your annuity payments for a lump sum of cash. No matter how you choose to sell your annuity contract, the transaction does require court approval. It is also important to discuss all of your options with a financial advisor prior to making the decision to sell.

There are many different types of annuities available in the market. They vary in benefits, conditions, payouts and other factors.

Annuities are popular financial assets because they ensure a person’s funds are protected. This high level of security is a relief to most, but it can also be a problem if an annuity owner’s financial circumstances change and they need access to the funds in the annuity.

There are two options to get money from an annuity against the terms of the contract: via withdrawals or from selling the right to future payments.

If you face an emergency and have expenses you didn’t plan for, you can withdraw money from your annuity. As long as it is not more than your contract specifies and is after the first five to seven years of owning the annuity, you shouldn’t be penalized for an early withdrawal. However, if your withdrawal does occur during this time, you could face penalties from the IRS and fees from the insurance company that issued your annuity, called surrender charges. If you withdraw from the account before you reach 59 ½ years old, you will also face an IRS early withdrawal penalty of 10%.

If you need to take out a larger sum for a crisis or because you’re buying a bigger home for your growing family or you’re investing in a business, you can sell the right to future payments to an annuity purchaser for immediate access to cash. The purchaser, called a factoring company, will give you options for selling some or all or your payments. If you choose to sell your right to future annuity payments, it’s important to negotiate a fair price for your payments. There are many annuity value calculators available on the internet that can help you determine the current and future value of your annuity.

For additional information on selling your future payments and the selling process, visit our selling annuity payments page.