Annuity Payments: Frequently Asked Questions
Click on any of the questions below to jump to the answer you’re looking for about annuity payments and selling them:
What Is An Annuity?
In simplest terms, an annuity is any stream of fixed, periodic payments over a specific time period. An example of annuity payments: when an individual wins a lottery jackpot and elects to take annual payments over a period of several years (generally, the term is 20 years). In the past, most annuities came from paid-up life insurance policies.
Today, there are several different types of annuity payout arrangements, some of which provide a guaranteed income for life and others that are for a specified period.
An example of the former type of annuity is known as a “life annuity.” Similar to a defined benefit plan or pension, this is meant to provide an income for the remainder of a person’s natural life. Most of these annuities do not actually pay up until the insured’s death, but do pay up until an advanced age, for example, 90. As more people today live much longer, the number of insurance companies that offer life annuities has decreased; only three major insurers in the U.S. currently offer life annuity plans.
Are My Annuity Payments Safe & Guaranteed?
Unlike savings and checking accounts, your annuity is not insured by the FDIC, even if the annuity was purchased at a bank. If your annuity is with a top rated insurer that has an A+ rating you should be safe but sometimes insurers do become insolvent. Typically the policies are protected by the guaranty association in your state. Additionally, other insurance companies may directly inject funds to avoid or reduce reduction in scheduled benefit payments.
I’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 and current annuity payments fail to meet your needs.
You can also sell your payments for a certain amount of time, after which the rights to receive future payments revert back to you.
If I Received My Annuity As a Gift or Inheritance, Can I Still Sell It?
Because an annuity is an asset, it can be left to heirs named in a will. Some examples:
These are normally paid out in installments over time. If the payments are still in force at the time of the beneficiary’s death, they may be passed on to family members. However, while the annuity or structured payment arrangement may have been appropriate for the original beneficiary, it may not necessarily fit with your current situation or financial objectives. As a result, you may decide to sell the annuity.
As the legal owner of the annuity payments, you have the same legal rights to sell your annuity as if you were the original beneficiary. By getting an annuity payout, as opposed to structured payments over an extended period of time, you will have more flexibility, particularly if you wish to start a business or purchase a home without incurring debt or take advantage of a time-sensitive investment opportunity.
Will I Get Taxed When I Sell My Annuity For Cash?
Whether or not annuity payments are taxed when sold to a structured settlement buyer depends on the nature of the annuity. In most cases, such a transfer is tax exempt under current Internal Revenue laws.
This said, there are many different kinds of annuities, and these are different from the kind of structured settlements that one may receive from a successful lawsuit or a large insurance settlement. An annuity may come from some type of monetary account or a life insurance policy. Annuities from a 401(k) or other retirement account are taxed as soon as you start drawing out the money at retirement, though they are tax-deferred while the worker is making contributions.
Keep in mind that unlike a structured settlement from a lawsuit, an annuity is an investment vehicle that the beneficiary contributes to over time, building a cash reserve from which s/he can receive regular payments later on (a good example is a life insurance policy).
There may or may not be tax penalties if you sell an annuity for cash. A great deal depends on the nature and source of the annuity, whether you are the original owner or received it as a gift or legacy. If you have questions about the tax liability associated with selling an annuity, it is strongly recommended that you consult with a tax attorney or CPA prior to contacting CBC.
What If A Family Member Passes Away Without Receiving Their Remaining Annuity Payments?
It depends on the wording in your family member’s structured settlement agreement. Sometimes the periodic payments end when a person dies, sometimes they are guaranteed for a certain period of time. In this case, the designated beneficiary becomes the payee of remaining guaranteed structured settlement payments.
The beneficiary can continue to receive the periodic payments or sell them for a cash lump sum payment. They also have the option of selling a portion of the payments for cash and keeping the remaining payments. This can come in handy if you have an immediate need for cash to pay off debts or funeral costs. Of course, you can sell all of your future payments for a large amount and reinvest part of the lump sum in more liquid assets.
Why Do I Need Court Approval To Sell My Annuity Payments?
When you are looking to sell your future payments, it may not be the best idea. Perhaps you rely heavily on the income or the offer you have received isn’t the best you can do. This is why selling your future payment requires court approval. The courts are supposed to review the transaction to determine if it is in your best interest. So how can they do that if they don’t know why you need the money? Sure it is in the documentation but hearing the reason directly from you makes a huge difference.
Prior to 1970, injured parties would receive cash lump sum payments. Due to a series of unfortunate events in Canada and Europe, there was a need for settlement money to last throughout an injured party’s lifetime. As a result structured settlements became popular. For over 30 years, the federal government has been encouraged their use even for settlements less than $10,000.
However, sometimes the annuitant’s needs change requiring access to their future payments sooner than planned. In order to protect their rights, forty-eight states and the federal government have enacted consumer protection statutes establishing specific conditions regarding the sale of future annuity payments. Under the federal law, court oversight and approval is required for individuals choosing to sell structured settlement payments to a third-party. The statutes vary by state but they’re designed to protect the interest of all the parties involved especially the seller.