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Don't Want Your Annuity? You May Be Able to Sell It

Are you receiving annuity payments but you'd prefer a single lump-sum payment instead? As appealing as receiving a lump-sum payment might sound, you may be under the impression that you're stuck with those annuity payments and a lump sum is out of the question. Not necessarily. You may be able to exchange your annuity for a lump sum through a secondary market for annuities.

Why own an annuity?

Sometimes, receiving annuity payments is not your choice. For example, you may be getting annuity payments because you were named as a beneficiary of an annuity owned by someone who's deceased. Or, as in most cases, you probably purchased your annuity based on specific financial circumstances and goals. Some of the more common reasons for owning an annuity include:

  • The need for a steady income stream for a specified period of time or for the rest of your life
  • The appeal of a relatively low-risk investment such as a fixed annuity that may provide a guaranteed rate of return (subject to the claims-paying ability of the annuity issuer)
  • The desire for tax advantages associated with deferred annuities, although interest earnings will be subject to income tax when withdrawn

Why a lump sum?

It is not uncommon for circumstances to change during your life, and some of your reasons for having an annuity may no longer apply. If you have a deferred annuity, one from which you have not begun receiving periodic payments, you might be able to cash in the annuity. However, there are some issues to consider. Interest earnings within the annuity will be taxable as income to you in the year you receive them. And, if you're under age 59½, you may face a 10% tax penalty on earnings unless an exception applies. Also, if your deferred annuity hasn't reached maturity, surrender or withdrawal charges may reduce the amount you'll receive.

On the other hand, if you've already started getting periodic payments, your insurance company might allow you to receive a lump sum equal to the present value of the future payments you'd otherwise receive. This is commonly referred to as the commuted cash value. But many companies don't allow this option, meaning once you begin receiving annuity payments, you can't accelerate them or receive a lump sum.

Another option: sell your annuity

A growing market known as the secondary annuity market has emerged which offers annuity owners the opportunity to sell the future annuity payments in exchange for a lump sum. Most annuities are eligible except "life only immediate annuities," where the payout isn't guaranteed to last a fixed period of time, as well as annuities in 401(k) accounts, 403(b) accounts, or IRAs. The amount you may receive from the sale of your annuity is primarily based on the total amount of payments expected to be made, the period of time over which the payments are to be made, the prevailing interest rates at the time of sale, the financial strength of the insurance company, and whether your annuity has a death benefit.

And you can sell the entire annuity or a portion of each annuity payment in exchange for a lump sum while continuing to receive the balance of the payments. For example, let's say you're receiving a monthly annuity payment of $4,000, which is to continue for 20 years. You only want half of each payment, so you sell your right to half of each payment (or $2,000) for a lump sum, while retaining the right to receive the balance of each payment ($2,000). The annuity buyer will receive a total of $480,000 ($2,000 x 240 months) at the end of 20 years. But you won't get the full $480,000 as a lump sum. Since the buyer has to wait to receive payments, the annuity buyer applies a discount rate to the lump sum paid to you (the discount rate varies by annuity buyer, the type of annuity you're selling, the length of time payments will be made, as well as other factors). It basically works the same way whether you sell a part of your annuity or the entire account.

What about taxes?

The gain (or loss) from the sale of your annuity is determined by comparing your cost basis (your investment in the annuity) to the lump sum you received. Any gain is taxed as ordinary income and not as capital gain.