IS SELLING AN ANNUITY A GOOD IDEA?

ANNUITY A GOOD IDEA

This is a common dilemma that revolves in the minds of people regarding selling annuity payments. It does benefit and in what way it benefits would further help in decision making.

INTRODUCTION 

 

Paying a fixed sum of money to get the benefit of a steady income in the future or receiving periodic payments from the insurer is termed an annuity.

Major examples of annuity payments are regular deposits to the savings account, home mortgage payments, insurance payments made monthly, and pension payments.

If we look into broader ways annuity guarantees a steady cash flow in the retirement period of a person. This is generally an insurance contract issued and is being distributed by the financial institutions to pay out invested funds as a fixed income in the future. Investors invest in or purchase annuities having premiums being paid monthly or lump-sum payments.

 

TYPES OF ANNUITIES:

 

There are various types of annuities which include Immediate Annuity, Deferred Annuity, Fixed Annuity, Variable Annuity, Lump-sum Annuity. 

 

REASON WHY DO PEOPLE BUY ANNUITIES?

  1. Tax-Deferred Growth
  2. Income for life 
  3. Retirement Savings 
  4. Inflation
  5. Protection From Creditors 
  6. Protection From the stock market  
  7. Long term insurance 

REVIEWS OF PEOPLE

ANNUITY A GOOD IDEA 

 

According to people, fixed annuities provide better-fixed rates in comparison to certificates of deposit (CDs) and any other financial asset. Eight out of ten annuity holders have annual household incomes. 

 

FACTS:

  • DEFINED BENEFIT PENSIONS and SOCIAL SECURITY  are examples of lifetime guaranteed annuities that ensure a steady cash flow in the retirement period.
  1. Annuities are being considered as the sole instruments that guaranteed lifetime income as it maintains a steady cash flow during the retirement 

Annuities are unique because they can create guaranteed income that can’t be outlived. The income will continue even after the entire premium. Any expected earnings are being collected. No other monetary product can deliver that assurance. 

 

ARE SELLING ANNUITY PAYMENTS WORTH IT?

 

Visualizing annuity payment as a retirement income is a very important step and then further decisions need to be considered.

In the course when financial needs tend to change or if an annuity is no longer meeting the requirements,  then a rational decision lies in selling your annuity for a sum of cash.

Annuities can be sold in two ways :

  • Either entirety  i.e  If sold all at once, you forfeit receiving all future periodic payments.
  • Either in portions, if you don’t want to let go of your entire income source then selling a portion of it would be more appropriate. However, if you sell a portion of the payments, you will receive a lump sum of cash upfront, and at a later time, you can receive periodic payments.

MAJOR REASONS FOR SELLING ANNUITIES :

  1. Mostly the selling occurs when there is a specific need for money and in that case selling of annuities acts as financial resources that would help in solving financial dilemmas.
  2. Making major life purchases such as buying a house, car, or commencing business.
  3. Paying off credit card debt and improving  their credit score
  4. Paying  off the  medical bills
  5. Financing higher education or paying student loans
  6. Financial emergency  

 

CASE STUDY :

Following is the real-life situation when people gained from annuity payments :

The case is about ELLEN :

ELLEN’S STRATEG

$3,000/month benefit is paid Tax-Free for the following :

  • Home Health Care
  • Assisted Living
  • Skilled Care

Ellen’s Assets

She sold her business to Wise path, an insurance company that was able to help Ellen invest $100,000 in an Annuity, it gained.

The gain received in annuity Ellen to purchase a Lifetime Long-term care Benefit to safeguard her future needs.

As she chooses to pay with a single premium, Ellen was guaranteed that she need not pay more in the future. Also, there are no unexpected premiums that would increase. 

Why This Worked

In the retirement period, the assets generate income. 

Long-term care needs are uncertain, so there must be products that are available for Long-Term Care. 

BENEFITS OF SALE :

  1. The sale of an annuity payment can be a suitable option to gain liquid cash and helps in achieving financial flexibility.
  2. Having direct access to the funds allows a person to pay off the debt, put down payment towards the purchase of a new house, replace a broken vehicle, or cover other immediate financial needs.
  3. The sale of annuity payments could be the solution to financial discrepancies. cashing out a portion of the annuity could be the solution to waive off unnecessary debt.
  4. More Options – Annuity owners do not have to sell entirely as there is an option of portion sale too which ultimately opens up a multitude of options to receive quick cash while still being able to invest in the future.
  5. Less administrative responsibilities would be there and a person would be free from the complex system of managing the payments over the long run.

 

So summing up, selling annuity payment benefits mainly when the annuity is longer fulfilling the needs and requirements. There is a financial emergency otherwise it’s a good source to maintain a steady flow of income,  especially in retirement.

Most people prefer to stick with an annuity. People who are especially in their late 80s or 90s generally have very good annuities, for example, some of them pay an income of 15% a year – which they never want to swap.

But if there is an annuity in the past couple of years, when rates have fallen or the annuity is no longer beneficial then it’s better to sell that annuity. 

HERE ARISES THE MOST IMPORTANT QUESTION – HOW MUCH AMOUNT WILL A PERSON RECEIVE FOR SELLING THE ANNUITY?

According to the government, the annuity income will be offered at the price that an auction and financial institution will bid. You sell it to the -highest bidder for cash, then the annuity company will pay the buyer the money. you would have to get in the retirement period until death.

It is also dependent on the health of the person. The older or less healthy a person is, the less they will receive as the buyer will only receive the estimated income until the seller’s death.

However, others state that for the persons who retired recently, selling up the annuity payment would be beneficial. In an independent pension consultancy, holders of annuities who purchased five years ago could get back the amount equivalent to that has been put in, irrespective of the fact that income has been withdrawn throughout those five years. 

TAXABILITY :

Selling annuity payments does have rise to tax implications. The payment that would be received from an annuity purchaser will be treated as income and hence will be taxable at the end of the financial year.

For example, a person of  70 years receives Rs75,000 on the sale of an annuity in 2020. The other income is the state pension only, worth around Rs 6,000 a year. Now, for the tax year 2016-17, tax on total earnings of Rs 81,000, means that nearly Rs 40,000 will be taxed at a rate that is  40% higher. Some people with larger annuities even are tipped into a 45% tax band.

CURRENT STRATA:

‘’People who sell their annuity income to a willing buyer currently follow a 55% tax charge rate, which even rises to 70% in some cases.’’

FOLLOWING ARE SOME IMPORTANT POINTS THAT ONE HAS TO BE AWARE OF :

  1. FEE CHARGED: The primary fee for selling an annuity is the discount rate being provided by the annuity buyer. In exchange for upfront cash, buyers usually charge a fee to gain from the transaction. The discount rate is determined by estimated future interest rates. The lower the rate, the more the seller will profit from your lump sum. The higher the rate, the more sellers would stray away from the initial contract value.

CAUTION 

‘’ Financial advisor needs to be contacted before this transaction, and      consider  looking out for more shopping buyers that will provide with the best ‘’

    1. GOVERNMENT ANNUITY-  Social Security and disability are technically government annuities because they are payments that are regular and fixed. However, Social Security and disability checks can never be sold. A government annuity is also a kind of pension that is being received after retiring from a state or a federal government position. It might be illegal to sell the pension. Many federal pensions can’t be sold, and are governed by state laws that limit the sale of other government pensions. 
    2. ANNUITY THAT CAN’T BE SOLD – Every type of annuity can’t be sold. Some examples of annuities that can never be sold are -payments from the divorce settlement, child support,) veteran’s benefits. Social Security and disability payments are also not in the category of sale. In addition, many factoring companies are not allowed to purchase workers’ compensation payments, pensions, or company buyouts.
  • LEGALITY OF SELLING ANNUITY- As long as the annuity contract is not the result of a lawsuit settlement, it is legal to sell the annuity without the approval of a judge. On the other hand, ‘’sale of the structured settlement ‘’requires court approval. The judge’s role in these transactions is to ensure that the selling of settlement payments is in the best interest and won’t put you or your family in financial jeopardy

PROCEDURE TO CARRY ON SALE OF ANNUITY PAYMENT 

The sale of annuity involves the following steps:

 

  1. Research or look for the annuity buyers for the best service.
  2. It is very important to search around for the right annuity buyer. Beware of fraud and unethical practices. Trustworthy annuity purchasers will have good reviews, offer them free quotes, and avoid high-pressure sales.
  3. Receiving a quote.
  4. The quote should have a low discount rate to keep as much money as possible. The discount rate generally ranges between 9 and 18 percent. The current value of the annuity depends on certain factors, such as the size and frequency of the payments. 
  5. Consultation with a financial planner
  6. Completion and submission of required paperwork.
  7. After consultation with a financial planner, complete paperwork must be there to allow buyers to access the annuity contracts to provide identification, tax forms, and other necessary documentation requested by the purchaser.
  8.  Receiving money
  9. This is the last step when money is received.

Till now the emphasis has been laid upon the benefits of annuities and how people gained from them and when we sell them the reason is, the financial urgency, so annuities benefit the person but everything has pros and cons so the following are the disadvantages of an annuity :

  1. Sometimes Returns of an Annuity doesn’t match the investment you made in 

The insurance company invests money majorly in the specific index fund. But the insurer caps the gains through a participation rate. Thus, If the participation rate is 80%, then the investments grow by 80% of the amount grown by the index funds.

  1. Sometimes it is difficult to step out of an annuity 

Since there are many types of annuities, this is confined to immediate annuities where the person is not able to get it back or even pass it to the beneficiary

CONCLUSION :

Summarizing all, we reach the judgment that annuities do benefit and are a steady flow of income in the retirement period and have other enormous advantages too but Nothing in this financial sphere is resistant to disadvantages, and annuities also are not an exception to this.

So before selling annuity payments the future benefit of these should be considered in vigilance and it is necessary to seek the advice of the financial advisor and assess the benefit value of the annuity, for example- Many people complain that they are being trapped in poor-value annuities which gets disappear on their death rather being passed on to their heirs. That’s why to make a rational decision every aspect must be considered and a proper assessment of these aspects should be do

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