SelL Annuity payments
Should I Sell My Annuity?
Some financial advisors will tell you that selling your annuity is rarely a good ideal. How do you know what’s right for you in your situation? Here’s how some things you may want to consider determine whether or not you should sell. These suggestions are not individualized for you--we recommend seeking advice from an independent financial professional before selling major assets.
Why are you considering selling?
Like most people, if you’re considering selling your annuity, it is probably because you need money for something. While this need might not be imperative or urgent, it could be weighty, which makes selling very attractive, especially if you still have a large amount of cash left. Below are common situations when selling comes up:
- Housing – If you want to buy a house but you do not have a large chunk of money to put down on that house, selling your annuity may be a great way get that lump sum of money you need. Generally, the more cash you put down on a home, the cheaper that home will be in the long run, as a large down payment can often shrink interest rates and take a large bite out of the price of the house that will run up interest over time.
- Schooling – Getting an education has long been stressed an extremely valuable. However, if you don’t have the money you need to pay for tuition, books, rent, and food, you have a problem. The regular payments that you receive from your annuity may be far too low to actually cover your monthly costs while in school. If this is your case, selling may be a good way to fund your schooling.
- Pay off debts – A large burden of debt can make it impossible to do things that you want or need to do, including buying a home, getting a line of credit, going to school, or even getting a job. If you are deep in debt and want the freedom that comes with minimal or no debt, getting a lump sum of money can be helpful. You will do well by considering future income possibilities and likelihood, interest rates for your debt, and your spending habits.
- Making an investment – Perhaps you want to make an investment that requires more money than you can access. Selling an asset with a close to guaranteed return may or may not be the best move. Consult an independent financial professional.
- Starting a business – You generally need capital to start a business. Accessing other people’s money may not be possible for you. If you’re considering selling your annuity, take your time. Consider the risk. Take your time. Consult a professional.
- Helping a loved one in need – Would you like to help your loved one or do you need to help your loved one? Is the matter urgent? Is it an emergency? Are there other options?
Why do some people tell you not to sell?
Selling your annuity will net you less than the amount contracted when you obtained your annuity.
Waiting to receive all of your annuity payments will net you more money, including time value of money considerations, than you will receive if you sell it now. Is it best to sell now or can you afford to wait?
Determining an annuity value does not have to be difficult. We included the formulas for both present value and future value for your convenience.
The present value of an annuity
Is receiving $10,000 today the same as getting $2,000 per year for five years? The time value of money financial principle states that a sum of money is worth more today than it is in the future. The sum of the present and future money may be the same but their value or purchasing power will differ. The time value of money is reflected by the present value of an annuity (PVoA), that is, the amount which if invested at the start of first period at the given rate of interest will equate the sum of the amount invested and the compound interest earned on the investment with the product of number of the periodic payments and the face value of each payment.
To calculate PVoA or how much a stream of payments is worth currently (not necessarily right now but at some time prior to a specified future date) the following formula is used:
PVoA = PMT [(1 - (1 / (1 + i)n)) / i] (where PVoA = Present Value of an Ordinary Annuity, PMT = Amount of each payment, i = Discount Rate Per Period, n = Number of Periods).
As there are two types of annuities, annuity -ordinary and annuity-due (the present value of a stream of equal payments, where the payment occurs at the beginning of each period), to calculate the present value of an annuity due, the result must be multiplied by (1+i).
Individuals and businesses use a discount rate based on what minimum return they seek from the annuity. The higher the discount rate, the lower the present value of the annuity.
The future value of an annuity
The Future of an annuity (FV) is an accumulated value in that it represents the accumulation of both payments made or borrowed and interest earned or charged. While the Present value of an annuity equation answers the question "What is it worth now (or some time prior to then)?”, the FV of an annuity equation answers the question "What will it be worth then?" Since money has time value, we naturally expect the future value to be greater than the present value. The difference between the two depends on the number of compounding periods involved and the going interest rate.
To express the relationship between the future value and present value or to calculate the future value of a stream of equal payments made at regular intervals over a specified period of time at a given rate (ordinary annuity), the following formula is used:
FV= PV (1 + i)n(where FV=Future Value, PV = Present Value, i = Interest Rate Per Period, n = Number of Compounding Periods).
The first and last payments of an annuity due (a stream of fixed payments where payments are made at the beginning of each period) both occur one period before they would in an ordinary annuity, so they have different values in the future.
How Variable Annuities Work
A variable annuity is an insurance contract between the annuitant and an insurance company, under which the insurer agrees to make periodic payments, beginning either immediately or at some future date. During the first (accumulation) phase a variable annuity contract may be purchased by making either a single purchase payment or a series of purchase payments. The annuitant chooses how the money will be invested. He or she chooses investments from a pre-selected list of funds (these funds are called sub-accounts inside of a variable annuity) which can range from aggressive stock funds to conservative bond funds, money market instruments, or some combination of the three. During the second (payout) phase the insurance company guarantees a minimum payment. The remaining income payments can vary depending on the performance of the managed portfolio. You may receive your purchase payments plus investment income and gains (if any) as a lump-sum payment at the beginning, or you may choose to receive them as a stream of payments at regular intervals (generally monthly).
Most variable annuity contracts offer death benefit riders, which can provide a benefit for your heirs or beneficiaries if you die before the insurer has started making payments to you, and living benefit riders, which let you receive periodic payments for the rest of your life and provide guarantees as to how much income you could withdraw from the policy at a later date offering protection against the possibility that, after you retire, you will outlive your assets.
Variable annuities are also tax-deferred. You pay no taxes on the income and investment gains from your annuity until you withdraw your money but when you take your money out of a variable annuity, however, you will be taxed on the earnings at ordinary income tax rates rather than lower capital gains rates. Withdrawals before you reach age 59 1/2 may be subject to a 10% early withdrawal tax penalty.
How Tax Deferred Annuities Work
A tax-deferred annuity (TDA) is commonly referred to as a tax-sheltered annuity (TSA) plan or a 403(b) retirement plan which is directed at employees of certain public education organizations, non-profit organizations, cooperative hospital service organizations and self-employed ministers. This is a retirement plan in which an employee makes tax-deferred contributions from his/her pre-tax income and is not taxed on the contribution until he/she begins to receive the periodic payments after retirement. Therefore, the investments can grow at a much faster rate than normal savings accounts as the tax-deferred interest do accumulate over time, giving the investors more money during retirement. The total income at the end of the day would not only consist of the earnings and interest earned but the principle investments as well which is capital protected under this plan.
Unlike other annuities, there is a cap to the maximum amount contributed annually to the retirement plan. For an individual, the maximum amount one can contribute per year is $14,000 while employers may make a joint contribution to their employees fund up to the combined total of $44,000. If the employee is above 50 years old, he or she may contribute another $5000 more above the ceiling while if the employee has been with same employer for more than fifteen years, the ceiling is raised by another $3,000.
As with other annuity plans, tax-deferred annuities were created to assist employees in their retirement days. Therefore withdrawals before you reach age 59 1/2 may be subject to a 10% early withdrawal tax penalty levied by the Internal Revenue Service. Also, any withdrawal before retirement age will be subjected to the normal income tax brackets
Single Premium Annuity
Most types of annuities are contracts in which people make steady payments over an extended period of time to establish the funds used to create the annuity. In contrast with these types of annuities, many insurance companies and financial firms offer a single premium annuity which is a contract guaranteeing income for a set period of time , which is established by making a single lump sum payment.
Single premium annuities can be purchased at almost any age. A single premium annuity can be a good investment option for someone who has just inherited money, reached the maturity date on a CD or retirement account, sold property, or settled a life insurance claim. The amount of the premium varies but the larger the premium paid to establish a single premium annuity, the larger the payments will be, as a general rule.
Single premium annuities are either income or single premium immediate annuity (SPIA) or deferred. SPIA is a contract between you and an insurance company designed for income purposes only. Unlike a deferred annuity, an immediate annuity skips the accumulation stage and begins paying out income either immediately or within a year after you have purchased it with a single, lump-sum investment. The payments from an immediate annuity can be sold for cash without going through the hassle of going to court for a judge's approval. Because you purchase this investment product on your own — rather than accepting it as a result of a lawsuit — you have the freedom to sell payments for cash if you're experiencing financial difficulty.
What is a Hybrid Annuity?
To satisfy a combination of retirement objectives such as long-term care funding or wealth transfer to heirs––while still providing one with a secure income, many individuals who have long-term horizons and want to participate in bond and stock markets choose hybrid annuities. Hybrid annuities or hybrid income annuities are a type of insurance contract that allows buyers to allocate funds to both fixed and variable annuity components. Most hybrid annuities allow the investor to choose the amount of assets to allocate to the more conservative, fixed return investments, which offer a lower but guaranteed rate of return, and what amount to allocate toward more volatile variable annuity investments, which offer the potential for higher returns. So, these annuities refer to a combination of several unique aspects of various types of annuities that have been combined to create a new type of annuity.
Technically a hybrid annuity is a fixed indexed annuity with an innovative new generation income rider attached to it.
Three basic beneficial components are applicable to hybrid annuities:
- Lifetime income potential - lifetime income is provided once the annuity comes to term. Typically, the amount of income you will have is determined by the number of years withdrawing the income is deferred. You monthly income is guaranteed once you begin receiving payments. Payments will never increase or decrease during your lifetime.
- Long-term assistance rider - the long-term assistance rider will pay a higher income to cover long-term care requirements.
- Death benefits to heirs - death benefits allow you to leave a portion of the annuity to your heirs. The amount allocated for death benefits changes the amount you will receive.
What are Immediate Annuities?
Immediate annuities (sometimes called income or payout annuities), are basically a mirror image of a life insurance policy. As the name suggests, immediate annuities start paying out right away, so they're are frequently used by people already in retirement.
The immediate annuity doesn’t accumulate any earnings for you at all. It’s purchased strictly to provide you an income payment on a regular basis which begins right away. With a fixed immediate annuity you lock in an income stream for your entire life (or a specific number of years, if you choose). Knowing they can count on a guaranteed income stream can be a boon for retirees who don't want to worry if they will have enough money to pay the bills each month. Plus, the payments can be higher than you would normally be able to get by putting your money into safe investments on your own though it has the drawback of loss of purchasing power from inflation.
With a variable immediate annuity you have the potential of keeping the buying power of your lifetime payments ahead of inflation by divvying up your investment among a variety of mutual-fund-like portfolios. But there are high fees associated with this type of annuity.
There are other disadvantages of immediate annuities, such as it is irreversible once it has been purchased. This may pose a problem should the annuitant need a large sum to deal with an emergency. Another large drawback of an immediate payment annuity is that it is terminated upon death of the annuitant. This means that in the event of the annuitant's premature death, the size of the estate left to his or her heirs may be much smaller than it would have been if the immediate payment annuity had not been purchased. That’s why financial planners do not recommend this type of annuity for retirees who are not in good health .
What is an Indexed Annuity?
Indexed annuities or equity-indexed annuities have characteristics of both a fixed interest annuity and a variable annuity. With an equity-indexed annuity, you get to participate in the upside when the stock market is climbing (as with a variable annuity), but you also protect yourself against the downside since you'll earn a guaranteed minimum return (usually 2% to 3%) even if stock prices fall (as with a fixed interest annuity). In short, an equity-indexed annuity may pay a higher return than a standard fixed annuity would, but have less risk than a variable annuity.
On the other hand, equity-indexed annuities are very complicated investment vehicles, and they come in a wide variety of forms. Their complexity makes them extremely difficult for investors to understand, and marketing pitches can often be deceiving. They also don't necessarily give you the entire return of the market index they're tied to. In some indexed annuities, surrender charges can run as high as 20% and last for 15 or more years. So you may not have access to all of your money without paying steep penalty charges for a long time.
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