What is an Immediate Annuity?
An immediate annuity is a contract between you and an insurance company where you make a lump sum payment (single premium) in exchange for a stream of income at fixed intervals beginning immediately (or within the first year). Depending on the specifics of the contract, the income stream can last for your lifetime (and possibly your spouse’s) or a certain period only.
Immediate annuities are often purchased by people that are close to, or have entered retirement and are looking for an immediate income stream to supplement other sources of income. Other income streams can include social security payments, a pension or IRAs, etc.
An appealing aspect of an immediate annuity is that it shifts the ‘investment risk’ to the insurer. So, even though most people are not able to participate in a retirement pension plan, an immediate annuity can create a similar benefit.
The term ‘immediate annuity’ refers more to the timing of the payments than the type of payments received. Immediate payments begin right after the premium is paid (or within the first year) while deferred annuity payouts begin at some pre-determined future date (after at least one year’s time).
The interest rate will tell the type of annuity it is. The rate will fluctuate in a variable annuity, stay the same in a fixed annuity and track a benchmark, annually in an indexed annuity.
Can I Sell My Immediate Annuity?
Yes, you can sell your immediate annuity payments for cash. In an immediate annuity, once you make the single premium payment to the insurance company, you basically turn over control of the money to the insurer. You likely won’t be able to withdraw the full amount since immediate annuities are typically irrevocable. If you find that you need the money sooner than your scheduled payments during this annuitization phase, you’ll likely be in a bind.
But if the annuity is transferable, you can sell the rights to your annuity payments to a third-party for cash. You can often determine transferability by referring to the ‘Ownership’ section or clause in your annuity contract.
On the secondary market, there are several funding companies that will purchase your single payment immediate annuity. They will act as a liaison between the insurance company and the annuity seller and will facilitate the process. They can help you understand whatever forms and documents are necessary to gather.
Reasons to Sell your Annuity
Nobody likes waiting for their money. This is especially true when an unforeseen financial need arises (which they always do). Getting up front cash for your annuity can help pay off high interest credit card or student loan debt, go on a vacation or start a business. Selling your annuity payments for cash can also help when life throws you some lemons. You can stave off foreclosure, pay for an unforeseen medical emergency (for either you or a loved one) or save a struggling business.
How Much Can I Get is I Sell My Immediate Annuity?
The first step to determining a value when selling annuity payments, is to fill out a quote box with some preliminary information such as what type of annuity it is, the insurer, the amount of your payments, the start and stop date of the payments, etc. The more information you can provide, the more accurate your quote will be. You will also need to include some contact information (email, phone number, the state you live in etc.).
Understand that the amount you’ll be quoted will not be the full amount (i.e. the sum of all the future payments). The funding company will apply a discount rate to this amount to determine the present value of the future payments. The discount rate takes into account a number of variables. This will determine what your quote is. Every circumstance is different but a 10-15% discount rate is often followed.
All else equal, you should receive more from a funding company when selling an immediate annuity than a deferred annuity. This is because the longer the buyer has to wait to receive payments, the less valuable they are now because of the time value of money which basically states that a dollar today is worth more than a dollar in the future, because of the effects of inflation and loss of purchasing power over time.
After receiving the quote, you will provide them with some basic information such as the annuity contract, a photo I.D., tax return (to show an annuity payment) and possibly others.