Here’s why it might be advantageous for you to gather your annuity payments into a single lump sum, instead of receiving them over a period of time.
Annuities are a lot like insurance but in reverse. Rather than you paying monthly premiums on an insurance policy and receiving a big payout when you pass, you invest a large sum initially to secure regular payments over time. With an annuity, commonly resulting from personal injury lawsuits or other legal settlements, the person or company you’re suing provides the large cash sum for the annuity, not you.
Personal injury lawsuits often conclude in a settlement where the injured party receives compensation for damages they’ve suffered. This compensation usually comes in form of regular payments – monthly, quarterly, or annually – funded by a one-time lump sum invested into the annuity. The payout each month is tied to this lump sum. The bigger the invested sum and the higher the interest rate, the larger the annuity payments over time.
Annuities come in two basic forms: term-certain annuities and life annuities. Here’s what sets them apart:
Term-Certain Annuities – This form guarantees a fixed monthly income over a long term. Commonly, it pays a stipulated sum until the recipient turns 90. Any leftover payments or lump sum at the time of the recipient’s death go to their estate.
Life Annuities – This type pays a specific amount every month, quarter, or year, until the recipient’s demise. Unless added options are included, after death, there are no more payouts.
For instance, an annuity can be designed to deliver payments to a surviving spouse after your death. Also, there are annuities that adjust your income based on inflation rates. However, adding these extras could reduce the monthly payments.
Deciding if an Annuity is Worth Selling
It’s crucial to keep in mind that your annuity might have been established to give you a stable, regular income. However, life’s circumstances change; if this happens to include your financial situation, selling your annuity could be a good idea.
Often individuals find that retirement didn’t pan out as they expected and monthly annuity payments are no longer serving their financial aspirations. In such cases, transforming the annuity into a sizable cash sum to diversify their investments, provide for their children, or pursue other goals can be a smart move.
Some may opt to turn their annuity into a lump sum to clear medical debts, take a holiday, or even extend their house.
Inherited annuities might not serve any purpose for some inheritors who don’t need regular income but could use a large cash sum. Whatever the reason, converting annuities, real estate notes, structured settlements, and similar financial instruments into cash can be smooth when guided by an informed and seasoned professional. Before making any moves, it’s crucial to understand fully the true value of your policy.
