In this first decade of the 21st century we have seen resurgence in the popularity of annuities. The aging Baby Boomer population, caught between the recent ravages of their retirement portfolios by the financial markets and the very real prospect of living beyond the average life expectancy, are rediscovering the many benefits of annuities as a secure retirement planning vehicle. And, while most of them are going into their annuity purchase with eyes wide open as to their liquidity constraints, circumstances do change and what was a good investment choice at the time, might not continue to fit your needs. So, for some people, it may be necessary to try to sell their annuity.
But wait. We were told that annuities are illiquid especially after they have been annuitized and the income payout has begun. We’re told that once we begin to receive income, our principal balance is irrevocably retained by the insurance company. While this may be true in terms of your contract relationship with the insurance company, the fact is that the growth in annuity popularity has spawned a robust secondary market driven my investors who are willing to pay cash for guaranteed income streams.
Sell Your Annuity with Eyes Wide Open
Selling an annuity is not a simple transaction; after all you are selling a contract, not a marketable security. It usually requires legal assistance which, in and of itself has spawned a whole industry dedicated to creating a secondary market for annuities. Some of these companies are direct investors in secondary annuities and others act as brokers to find annuity buyers. In either case, offers are made to the annuity owner based on a “discount” of the value of the annuity.
For income annuities this is a calculation of the present value of the total amount of income that the contract was expected to pay. An interest rate assumption that is favorable to the buyer is used in determining the discount, and ultimately, the amount of cash that will be offered. The higher the interest rate assumption used, the less cash will be offered. It can be a somewhat convoluted transaction which is why it is important to work with a trusted source. It would also be important to work with someone with access to the secondary market that is able to attract multiple offers.
Three Essential Steps to Selling Your Annuity
Selling an annuity is sometimes necessary due to changing circumstances, however, it should be considered as a last resort. We have always urge investors to go into an annuity investment with eyes wide open, after careful consideration of their financial situation. For annuity owners contemplating the sale of their annuity, we urge the same thorough deliberation through three essential steps.
Think it Through
The decision to sell annuity requires at least as much deliberation as the decision to purchase one, if not more. The income from an annuity, unlike from any other source, is secure, predictable and, for many annuity owners, it is their safety net. The decision to sell an annuity is typically made when it has been determined that future income needs are not as great as the need for immediate cash. Or, after a thorough evaluation, you found that you could achieve a better overall return on your money in an alternative investment that still fits within your risk comfort range.
You may also want to consider whether a partial sale of your income would better fit your needs. If you determine that you don’t need the full amount of your monthly income payment, you could sell the income portion you don’t need for a lump sum payment. The key is to thoroughly analyze your current and future income needs in order to make the most prudent decision.
Reach Out to Your Annuity Provider
While most immediate annuity contracts are very limited in their redemption options, it would be important to find out from your provider what if any options might be available to you. If your annuity is still in the accumulation phase, it is usually just a matter of knowing where you are in the surrender period. You are able to surrender your deferred annuity at any time; however, it may subject to surrender fees. If you are in the income phase, and have already received payments, there usually are no surrender options available.
Although your annuity provider may not be able offer any solutions for you, they may be able to offer some advice for going into the secondary market.
Thoroughly Investigate Secondary Market Buyers
You have probably seen their commercials on TV, firms that offer to pay you cash for your structured settlements and annuities explained. A Google search for annuity buyers will reveal a whole string of companies that will make the same offer. As with any financial consideration, you need to take all necessary steps to investigate the legitimacy and integrity of these firms, and not just one or two, but at least three or four.
Your best bet is to get a recommendation from someone you trust, otherwise, be prepared to ask a lot of questions and observe how willing they are to inform you without pressuring you into action. The true professionals in this market will offer you a free, no obligation analysis of your annuity, its fair market value and the prospects for a successful transaction.
Annuities remain one of the best retirement planning vehicles available, especially when used in concert with a well coordinated portfolio of investments, but financial circumstance and investment needs do change which may require a change in your portfolio. Selling an annuity is a key investment decision that requires as much planning and analysis as the decision to buy one. The good news is that the annuity market is so popular that there are buyers who will pay a fair price for your annuity.