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Timing is a big factor in choosing when to tap into your annuity money. Depending on when you purchased it, it might make sense to withdraw funds from your annuity, assuming your contract allows this. If you purchased your annuity recently, selling future payments may be a wiser choice.
Unlike people who bought annuities as part of a financial or retirement plan, structured settlement recipients are not allowed to withdraw money early. But you still have options, including selling future payments.
Or, if you haven’t yet received your settlement money, you may qualify for a type of cash advance to cover expenses while you wait.
Need Cash Now?
Annuities provide a reliable stream of cash over a period of time. But your financial needs can change in an instant and may cause you to reevaluate your annuity. This is especially true in cases of medical or financial emergencies and new business opportunities.
Early withdrawals usually come with expensive tax implications and surrender fees. Penalties tend to decrease over time, so if you wait several years, you may face lower fees.
But what if you can’t afford to wait because you need cash now?
You may get more money by selling payments on the secondary market instead of making withdrawals from your annuity account. Selling payments can provide flexibility and immediate access to a large sum of cash that you can invest in other financial vehicles or use to pay off long-term debt.
Reasons for selling an annuity include:
- Job loss
- Medical emergency
- Lifestyle change
- Annuity inheritance
How Do I Get Cash for My Annuity?
Rather than waiting years to receive their payments, some people choose to sell their long-term income products.
- Research Annuity Purchasers
- Start by shopping around for the right annuity buyer. Beware of unethical practices and fraud. Trustworthy annuity purchasers will have positive reviews, offer free quotes and avoid high-pressure sales tactics.
- Get a Quote
- Your quote should have a low discount rate so you get to keep as much of your money as possible. The average discount rate is 12 percent. The current value of your annuity depends on certain factors, such as the size and frequency of your payments.
- Submit Your Paperwork
- Once you receive a quote, you must complete paperwork to allow buyers to access your annuity contract. You’ll need to provide identification, tax forms and other documentation requested by the purchaser or insurance company.
- Present Your Case Before a Judge
- If you’re selling a structured settlement, there is one more step. A brief hearing to obtain court approval of your transfer must take place. Federal and state laws have this safeguard in place to ensure all the details of your transaction are fully disclosed and to make sure the sale is in your best interests.
Once the sale is approved, you will receive a lump sum of cash from your structured settlement.
You Can Get Cash Today Without Giving Up All Future Payments
When it comes to selling your annuity, you have options. You can sell the whole thing, or you can sell the right to some of your future payments.
Selling a portion of your annuity is generally done by either forfeiting payments for a set time period, say one to three years, or selling a specific dollar amount for a lump sum.
A partial annuity sale allows you to sell a period of your annuity payments for a lump sum of cash. For example, you can sell the first three years of your annuity payments in exchange for money you want for a down payment on a new home.
For that time period, your payments will stop. Once three years has passed, you will begin receiving regular payments.
You may also elect to sell a portion of your annuity payments. For example, if your payments are $1,000 a month, you may sell half or $500 a month, and continue to receive the rest of the payments.
A lump-sum sale allows you to sell a specific dollar amount of your structured settlement or annuity — $10,000 for example — instead of a certain number of payments that might not total the exact amount you need.
For the partial and lump-sum options, the annuity retains a cash value. If, at a later date, you encounter another circumstance where you cannot wait for scheduled payments, you can contact the funding company to sell additional payments. These flexible selling options allow you to tailor the transaction to your needs, taking only what you need.
Why You’re Not Receiving the Full Value
When someone purchases your future payments, it’s not a dollar-for-dollar exchange. Why is that? Because the overall value of your contract — say $100,000 — is only worth that amount over a long period of time. This can be explained by a concept called the “time value of money,” which states that a dollar in hand now is worth more than a dollar in hand later due to its interest-earning potential.
Factoring companies use discount rates to account for this discrepancy in value and make a small profit for giving you cash up front. For example, if you wanted to sell annuity payments worth $10,000, and the factoring company has a 10 percent discount rate, you would receive $9,000 in cash.
Factoring companies calculate the discount using fluctuating variables that include:
- Demand for their services
- Interest rates
- Time investment
Lawsuit Loans and Cash Advances
After winning a personal injury or wrongful death case, you may have to wait weeks or even months to receive payment.
This can be frustrating if you need immediate money to pay bills. In these cases, you may qualify for what’s known as pre-settlement funding.
Pre-settlement funding acts like a cash advance on a lawsuit settlement. These types of loans may also be referred to as lawsuit loans, alternative litigation financing, third-party consumer litigation financing, and structured settlement loans.
In general, companies that offer these products may advance money against your settlement. When you receive your settlement money, you repay the advance plus interest and fees, from your settlement.
Settlement funding has been part of the American legal system for more than 20 years. But major funding companies have come under fire for using controversial techniques to calculate interest rates and fees.
An April 2018 Cornell Law Review study found that while the median loan requested by a plaintiff was only $2,250, the funding company expected a median repayment of $4,849 — or a gross return of 115 percent in just over a year. The study concluded that one of the country’s biggest funders makes about 44 percent a year on each case.
It is important to use caution when considering these products. We recommend you have an accountant or attorney look over the pre-settlement funding documents before you sign on the dotted line.
When Annuities and Structured Settlements Can’t Be Cashed In
Some annuities don’t qualify for sale. These include annuities in tax-qualified retirement plans and straight-life annuities, which stop paying out at the death of the annuitant. These can’t be sold because the number of payments is not guaranteed.
2 Cited Research Articles
- Avraham, R. and Sebok, A.J. (2018, April 10). An Empirical Investigation of Third Party Consumer Litigation Funding. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3137247
- Fisher, D. (2018, March 19). Study on consumer lawsuit loans finds high rates, confusing terms. Retrieved from https://legalnewsline.com/stories/511365351-study-on-consumer-lawsuit-loans-finds-high-rates-confusing-terms