Sometimes You Need Emergency Access To Your Funds
You have a annuity which sends you income payment every month, and will continue to do so for many years to come. However, you would like access to that money for emergency or other reasons. There are two ways to access that money: through an annuity loan or by selling annuity payments.
Option 1: Get A Loan Against The Annuity
Let us briefly consider the first option. If you obtain a loan against your funds, you have to abide by the terms of the issuing insurance company. The interest rates charged are likely to be high as you are captive to the insurance company. If you do not repay the loan on time, the money is treated as a withdrawal and therefore subject to heavy early withdrawal penalties. This is why some people go for selling the annuity outright rather than borrowing against it.
Option 2: Selling
To sell your annuity means that you will redirect your payments to a third party bidder who makes a decision to accept the offer based on the length of time, the magnitude of the payment, the prevailing interest rates, and the quality of the insurance company which holds your original annuity. Then they bid by offering you a lump sum. Usually the lump sum will be between the amount of money you put in (the principal fund) and the total value of all your future income payments.
Get A Competitive Bid From Third Parties
If you are looking to sell, contact more than one company to get competitive bids or quotes for the lump sum payment. There is also the possibility that you will not get a good deal because of changing interest rate conditions. For example, when you first set up your fund, all the future payments were calculated at the prevailing interest rates. Assuming you have a fixed rate income, you would continue to get payments commensurate with the high prevailing interest rate even if the rates drop later in time. However, suppose that rates have risen. Then your annuity becomes less attractive because the third party companies always have the option of getting higher rates by placing their funds into other financial vehicles. Conversely, if rates fall then your annuity becomes more attractive.
Caveat Emptor: Bid Aggregators Do Not Always Look Out For Your Interests
One word of caution to anyone looking to sell. If you decide to submit your name to a bidding website, be warned that you may not be contacted by the most competitive bid. Rather these companies pay a fee to get a hold of your name and rights to bid for your terms. Therefore, it is possible that the company with the worst terms bids the hardest to get your name so they can make money off you.
Is the annuity formula making your head spin? Use our online annuity calculators to figure out your target fund size or theoretical income stream.
It's never too late to start planning for your future. Seek out professional help. Look for fee-only financial advisors whose interests are aligned with yours rather than some big fund firm behind the scenes who is trying to sell you something.
Your annuity savings now will provide an income stream later. The bigger your fund, the bigger your income stream. The relationship is nonlinear, such that the income stream grows faster than the fund size due to the effect of compounding interest.
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