Buying an Annuity
Tax advantages make annuities a popular method of saving for retirement, especially when you've already maxed out your 401(k) contributions.
What Is an Annuity?
An annuity is a financial asset. A person purchases an annuity from an insurance company, and the insurance company pays the annuitant the full amount of the annuity over a number of years.
Annuities are a popular way to set aside money for retirement, especially when a person has already contributed the maximum amount to their 401(k). They're also popular because money invested in an annuity will grow tax-deferred — meaning when you receive payments, you'll only be taxed on the interest earned, not on the amount you originally contributed.
The annuity contract is written when the annuity is purchased, and it dictates the annuity terms, such as when you will receive payments and how much each payment will be.
Types of Annuities
There are several types of annuities, but most fall into one of two major categories.
Immediate vs. Deferred
If you have an immediate annuity, you will begin to receive payments shortly after you purchase it. Conversely, deferred annuities take several years or decades before you begin receiving payments.
Fixed vs. Variable
Fixed annuities are low-risk and guarantee a certain payout. Variable annuities are riskier because they rely on the stock market, but could yield higher payouts.
How to Buy an Annuity
Buying an annuity is a straightforward process when you follow these steps.
Research Insurance Companies
Start by researching insurance companies to invest with. Many people choose to ask their accountant for help when selecting where to buy an annuity.
Work with a Licensed Broker
Once you select an insurance company, work with a licensed insurance broker who will get to know you and your needs to determine what type of annuity is best.
Discuss Your Goals
Come prepared to discuss when you want to start receiving payments, how often you want to receive them, and if you have an ideal payment amount in mind.
Apply and Purchase
Apply through the insurance company. No health forms or credit checks are involved. Pay the money up-front or in installments depending on the company.
Can I Cancel My Annuity?
There is a limited window to cancel an annuity after you buy it, called a "free look" period. This may vary from company to company, but free look periods typically last from 10 – 30 days after the annuity is issued.
Once the free look period has expired, you can choose to withdraw some or all of your annuity early, also known as surrendering the annuity. This can be a costly process, however, because annuities are designed to be financial planning tools.
Early Withdrawal Costs
When someone withdraws their money early, they are hit with heavy surrender fees from the insurance company, as well as tax bills and penalties from the government.
A Better Alternative
To avoid paying surrender fees and hefty tax bills, many choose instead to sell the right to some or all of their future payments to an annuity factoring company such as CBC Settlement Funding.
Learn About Selling Your AnnuityI've Worked with Another Annuity Buyer. Can I Still Work with CBC?
Yes. You are eligible to start the transfer process to sell part of your annuity even if you have previously worked with another annuity buyer.
While some people choose to sell their entire annuity or structured settlement for a lump sum, it is not necessary to do so. Depending on your needs, selling a portion of your annuity at different times may be the most logical option.
Selling a second portion of your annuity is a simple and easy way to get another lump sum of money if your financial needs suddenly change. You can also sell your payments for a certain amount of time, after which the rights to receive future payments revert back to you.
Let CBC Help
Our team of experienced, caring professionals will make the process of selling some or all of your structured settlement or annuity payments easy.