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If you’re interested in selling periodic payments for cash, you must first identify the origin of your payment stream. Certain sources of income, including annuities and structured settlements, may be sold. Locating important paperwork and analyzing contract details is an important step in exploring your financial retirement options.
If you or a loved one have made diverse investments over time, it can be difficult to identify where many sources of income originated.
Some payment streams, including annuities, guarantee money for retirement. But future payments can be sold if your financial circumstances change and you need cash now.
Before you can sell, however, you must first determine the origin of your income and examine associated documents and paperwork.
Possible Sources of Income
It’s easy to identify the origin of some payment streams, such as government-issued Social Security or disability checks. Others may not be so clear, especially if you’ve maintained a variety of investments throughout your life or are overseeing a complex estate after the death of a loved one.
A structured settlement provides regular payments to a plaintiff in a civil lawsuit. These legal arrangements guarantee lifetime income for an injured party.
Because structured settlements, which are typically executed through annuities, are legal judgments subject to strict regulations, it can sometimes be confusing to match the payments to the issuer.
Some of the confusion stems from the way structured settlements are set up, which includes multiple entities and transactions, starting with the defendant’s transfer of the financial obligation to a subsidiary of an insurance company.
The subsidiary, referred to as an “assignment company,” receives the settlement money from the defendant and buys an annuity to fund the payments to the injured party as specified in the agreement.
Therefore, if you or a family member negotiated a structured settlement, the payments likely originate from a large life insurance company or its subsidiary — not, as you might assume, from the company responsible for the injury or its property and casualty insurer.
Annuities are insurance products that provide a tax-deferred fixed income. People usually buy them to guarantee money in retirement.
An insurance company, such as Nationwide or American National, will send you regular payments once your annuity matures.
Annuities can be a dependable, relatively low-risk income option. However, situations change, and these financial products may no longer suit your needs. Or you may have inherited an annuity and wish to cash it out. If that’s the case, you’ll need to know which insurance company issued the annuity and the terms of the contract.
Unlike structured settlements, annuities purchased with the intent of generating future income are not owned by a third-party assignment company, but it may be tricky, nonetheless, to identify the source of income if you’re not the original owner.
If you receive workers’ compensation benefits, the company issuing your check might not be your employer.
In most states, employers can obtain workers’ compensation insurance through a government-run program, such as a state’s department of labor, commerce, or industrial relations.
Other states allow private insurers, such as Liberty Mutual, to provide workers’ compensation insurance to companies.
Most self-insured employers use what’s known as a third-party administrator, which is a separate company that handles claims processing, paperwork and management associated with workers’ compensation. The third-party administrator is responsible for the employer’s payments to the injured worker.
In cases where an employee is permanently disabled, the workers’ compensation claim may have been handled through a structured settlement. If this is your situation, you may have the same right as any other structured settlement recipient to sell future payments.
401(k)s and Other Retirement Accounts
Placing money in an employer-sponsored 401(k) or similar account is a common way to save for retirement. But what happens to that money when you leave your job?
If your 401(k) balance is less than $1,000, the retirement plan company may cut you a check for the balance and send it to your last known address.
Higher unclaimed account balances make things a little more complicated. For example, plan administrators are sometimes permitted to move funds into an IRA without your consent.
From there, it’s up to you to find the new trustee — which must be, according to the IRS, “a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian” — and claim your money.
At age 59 1/2, you can access your 401(k) funds without facing fees or penalties. You’ll have several options for accessing your money.
Typically, plans allow you to decide how much you will receive monthly or quarterly, with the option to choose a different payment schedule later. These regular payments come from your retirement plan administrator.
Another way to receive reliable payments is to buy an annuity with your 401(k) money.
While small lottery winnings are generally paid out immediately in cash, multimillion-dollar jackpots from state lotteries, Mega Millions or Powerball can be spread over 30 years using an annuity.
Most lottery winners choose to receive all their money upfront in a single lump sum. But annuities offer a few key benefits. Annuity payments amount to a larger sum over time than the lump sum because they are taxed at a lower rate. The annuity option can also limit potential reckless spending.
If you elected to receive your winnings via an annuity, but the payment schedule no longer allows you to cover your costs in a timely manner, you may be able to sell some or all of your future payments for cash now.
Lottery winners must get court approval to sell future payments. Contact your state’s lottery company to see if your annuity can be sold.
You may receive a pension from the government or private employer when you retire. Pensions are less common than in years past, offered most often to government employees, but they still offer recipients a reliable passive income.
Generally, you must apply for pension benefits in order to begin receiving them. This makes it clear what type of payment stream you have and where the money comes from.
However, things can get tricky if your former employer moves, merges, declares bankruptcy or terminates company pension plans.
You can check on your plan’s funding status by contacting your pension plan provider and requesting a Form 5500. Your provider must file this document with the government each year.
If your former employer has terminated your pension plan, contact your employer to find out who is now in charge of administering your benefits.
A life insurance company will likely pay your benefits if your traditional defined benefit pension plan is terminated with sufficient funding to pay all promised benefits.
If the plan is terminated without adequate funding, the Pension Benefit Guaranty Corporation may take it over. This group was created by the Employee Retirement Income Security Act of 1974 to encourage the continuation and maintenance of certain private sector pension plans.
If you are lucky enough to enjoy multiple retirement income streams, you may consider selling future pension benefits. Selling some payments can allow you to cover immediate and unexpected costs, such as major car and home repairs.
However, federal law may restrict or prohibit retirees from assigning their pension to someone else. Ask your pension administrator what restrictions apply and carefully review the terms of your plan.
Searching for a Lost Annuity or Life Insurance Policy
You received a contract when you purchased your annuity. This valuable document outlines the terms, interest rate and benefits of your annuity.
You may have misplaced this paperwork during the accumulation period of your contract. It can be stressful trying to locate it. Likewise, a missing life insurance policy can cause tremendous confusion after the death of a loved one.
Locating these important documents is the first step in exploring your options for managing this income. In the case of an annuity, a missing contract can create a barrier for selling future payments.
Where To Look
Unfortunately, there is no national or statewide database of every life insurance policy or annuity contract. However, there are resources and strategies that can help.
First, try to determine:
- The insurance company that issued the policy or annuity
- The agent or broker who sold the policy or annuity
- Whether the policy was purchased through an employer, union or association
Figuring out how to find an annuity may be a challenge if the agent or company you purchased it from has changed or merged with a different company.
The National Association of Insurance Commissioners Locator Tool
The National Association of Insurance Commissioners, or NAIC, offers a life insurance policy locator tool on its website. This tool was launched in 2016 as a national service to assist consumers attempting to access forgotten or lost life insurance policies and annuities.
In November 2018, the Massachusetts Division of Insurance credited the search tool with matching consumers with lost or forgotten policies totaling more than $2.1 million in just 12 months.
According to the NAIC, once a request is made, the organization contacts participating companies to search their records. If anything turns up, the insurance company will alert you.
The policy locator is a handy tool — but it isn’t perfect. Insurance companies participate on a voluntary basis, and even if a policy or annuity contract is located, it may take up to 90 business days before the company contacts you.
Insurance companies may also require you to provide additional information, such as a notarized death certificate or documentation of your legal right to obtain information about a deceased loved one.
What if I Still Can’t Find the Life Insurance Policy or Annuity?
If the search does not turn up the information you need, don’t give up.
Try these strategies:
- Check files, safety deposit boxes and storage units for insurance-related documents.
- If you are searching on behalf of an elderly or deceased relative, check address books or online contacts for lawyers, business associates, estate planners or financial advisors who may have information.
- Speak with the company that manages your loved one’s automobile or homeowners’ insurance. One of their agents may have written your relative’s life insurance policy.
- Check bank statements for deductions to insurance companies.
- Examine prior tax returns for potential interest earned on insurance policies.
If all else fails, be on the lookout for any communication from an insurer. Many insurance companies check their policies against Social Security Administration death records. Most insurers will attempt to locate a beneficiary after the policyholder’s death, even if no claim has been made.
You Found Your Money: Now What?
Locating your annuity documentation was an important first step, but if your objective is to sell or transfer your payments, you’ve got more work to do.
Understanding your contract and statement is essential to figuring out the type of annuity you own and your options for managing this income.
Your contract should clearly state all fees associated with selling payments. Keep in mind that if you withdraw money from an annuity too soon after purchasing it, you may face a surrender charge from the insurance company.
Understanding Your Annuity Statement
It’s vital to understand the difference between surrender fees and selling payments. You face surrender fees when you withdraw more money from your annuity than your contract allows.
Some contracts permit you to pull out money annually, usually up to 10 percent, without a surrender charge. Surrender fees generally range from 7 to 15 percent of the amount you plan to withdraw.
Deferred annuities let you withdraw funds early, though you’ll face a surrender charge if you take out more than 10 percent of your total annuity. Immediate annuities, on the other hand, are less likely to allow free withdrawals.
When you sell payments, you do not pay a surrender charge. Instead, the company that buys your payments deducts a discount rate from the amount they give you.
- Accumulated Current Value
- Accumulated value, also known as current value, tells you how much your account is worth. This includes all premium payments plus accumulated interest earnings.
- Surrender Value
- This is how much you can transfer or withdraw from your account prior to the end of the contract term.
- Surrender Period
- The period during which you face a penalty for withdrawing money from your annuity. This period usually lasts seven to 10 years after purchase. Some surrender periods are based on when premiums are paid and are adjusted yearly.
- Penalty-Free Withdrawal Value
- This is the amount available to you without additional fees. Different types of annuities offer different amounts of penalty-free withdrawals. It may be expressed as a percentage, such as 5 or 10 percent each contract year. Or it may apply only to the interest earned during a contract year.
- Additional Help
- Your annuity statement or policy should contain the 800 number for the issuing carrier. Give this number a call if you need policy specifics or help with general questions concerning your annuity.
Selling Your Payments
There’s a good chance that if you’ve gone to all the trouble of determining the type of payment stream you have, you intend to do something with it.
You may be updating your retirement plan or financial strategy or you may have encountered an immediate need for a lump sum of cash. If your goal is the latter, it’s important to consider the ramifications of selling your payments.
How the Process Works
Many companies specialize in purchasing annuities and may be interested in buying yours.
In a typical transaction, the recipient of an annuity or structured settlement signs over the right to some or all of his or her monthly payments to a factoring company in exchange for a lump sum payout.
Give us a call if you’re unsure about the selling process.
The payout will not be the full amount of your investment. A discount rate is the difference between what your annuity is worth and what you receive. Most states require purchasing companies to disclose their discount rates to consumers.
If you want to sell structured settlement payments, you will also need to undergo a court hearing and receive a judge’s approval before the sale is finalized.
Shop around and get free, competitive quotes from multiple companies.
There are a few ways to sell annuity and structured settlement payments, including entirety, lump sum and partial buyouts.
Partial buyouts allow you to sell some future payments and still retain regular annuity payments down the road. For example, if you choose to sell three years of annuity payments, you will receive a lump sum for that amount. After three years, your periodic payments resume.
Lump sum payouts allow you to receive a specific amount of money — $10,000 for example — instead of a certain number of payments that might not total the amount you need.
You may also sell your entire annuity investment for a one-time cash payout.
Annuities and structured settlements have attractive tax advantages. Structured settlements are never subject to taxation, and annuities are tax deferred.
However, if you sell your annuity payments before the age of 59 1/2, you will encounter a 10 percent tax penalty from the Internal Revenue Service.
Additionally, if you sell the total value of your contract, the amount in the annuity that exceeds what you paid for it — your principal — is taxed as ordinary income. If you purchased additional riders, they may also be taxed.
Where you live plays a factor, too. Some states tax annuity income somewhat differently than the federal government.
Discuss the tax implications of any transaction you are considering with a tax professional.
Keep Track of Records Related to the Sale
You don’t want to end up in the same situation you were in when you began this process — searching for documents as you try to get your personal finances in order.
To avoid this, you must maintain records of your transaction.
After you have appeared in court and accepted your cash offer, the buyer will send you transfer documents to sign and have notarized.
Make sure to create copies of these papers and keep them for your records.
15 Cited Research Articles
- CNN Money. (2016, May 28). 401(k)s: 401(k) distributions. Retrieved from https://money.cnn.com/pf/money-essentials-401k-distributions/index.html
- Friedman, Z. (2018, September 26). Here's What To Do If You Win $500 Million Lottery. Retrieved from https://www.forbes.com/sites/zackfriedman/2018/09/26/powerball-mega-millions-win-advice/#2036e37d2e88
- Haithcock, S. (2014, June 3). How to evaluate your annuity contract. Retrieved from https://www.marketwatch.com/story/how-to-evaluate-your-annuity-contract-2014-06-03
- Insurance Information Institute. (n.d.). What are surrender fees? Retrieved from https://www.iii.org/article/what-are-surrender-fees
- Massachusetts Division of Insurance. (2018, November 15). Division of Insurance Life Insurance Policy Locator Tracks Millions for Massachusetts Consumers in Second Year. Retrieved from https://www.mass.gov/news/division-of-insurance-life-insurance-policy-locator-tracks-millions-for-massachusetts
- National Association of Insurance Commissioners. (2017, February 2). Life Insurance Policy Locator Service Frequently Asked Questions. Retrieved from https://eapps.naic.org/common_web/life_insurance_policy_locator_faq.pdf
- National Association of Insurance Commissioners. (n.d.). Finding a Life Insurance Benefit When You Don't Have the Policy. Retrieved from https://content.naic.org/article/news_release_naic_life_insurance_policy_locator_helps_consumers_find_650_million_life_insurance.htm
- Nationwide Insurance. (n.d.). Search for a lost life insurance policy or annuity contract. Retrieved from https://www.nationwide.com/personal/insurance/claims/life/lost-policy
- Pension Rights Center. (n.d.). Tips for Keeping Track of Your Pension. Retrieved from http://www.pensionrights.org/publications/fact-sheet/tips-keeping-track-your-pension
- Sahadi, J. (2018, May 11). Before choosing an annuity, know the tax implications. Retrieved from https://money.cnn.com/2018/05/11/pf/taxes/annuities-taxes/index.html
- U.S. Department of Labor. (n.d.). Workers’ Compensation. Retrieved from https://www.dol.gov/general/topic/workcomp
- U.S. Securities and Exchange Commission. (n.d.). Annuities: What Are Annuities? Retrieved from https://www.investor.gov/introduction-investing/investing-basics/investment-products/insurance-products/annuities
- U.S. Securities and Exchange Commission. (n.d.). Pension or settlement Income streams: What You need to Know Before Buying or selling Them. Retrieved from https://www.sec.gov/files/ib_income_streams.pdf
- Wood, R.W. (2019, June 26). How Lawsuit Structured Settlements Work. Retrieved from https://www.forbes.com/sites/robertwood/2019/06/26/how-lawsuit-structured-settlements-work/#e217ce952e71
- Yochim, D. (2019, February 27). How to Find an Old 401(k) — and What to Do With It. Retrieved from https://www.nerdwallet.com/blog/investing/how-to-find-an-old-401k-and-what-to-do-with-it/