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What you need to know about Buying and Selling an Annuity
By Michael Vaughan

Annuities have become one of the most successful financial products in recent history with new annuity sales currently topping $200 billion annually according to the NAVA 2006 Annuity Fact Book. But, even with all that success (or possibly because of it), consumer finance reporters seems to regularly take annuities to task.

One of the main criticisms of annuities by planners, advisors, and reporters is their perceived lack of liquidity and lack of flexibility. The common belief is that once you purchase your annuity, you cannot sell it. And, with immediate annuities – those in which you receive periodic payments from the insurance company – you are stuck with it for life.

While that was once true, that’s no longer the case. The fact is you can sell your annuity to raise a lump-sum of cash through something called the secondary market for annuities (think eBay or classified ads for selling your annuity)

To understand how the secondary market can benefit you, it’s important to understand why people might invest in annuities in the first place.

According to The Annuity Advisor, a book published by The National Underwriter Company to serve as an objective and impartial view of annuities, “the problems that annuities solve – the needs that they meet – can be identified and broken into several categories: 1) The need for a known income stream for a specified period or for the life of the annuitant(s), 2) The need for a guaranteed rate of return, 3) The need for a better non-guaranteed rate of return, and 4) The need (or desire) for tax advantages – one of the main appeals to a deferred annuity is tax-deferred growth, although the gain will ultimately be taxed (tax-deferred does not mean tax-free).”

According to the website AnnuityTruth.org, which is operated by H.E.L.P., a community-funded, non-profit resource for older adults, the suitability of an annuity within a specific financial plan “depends on the person's financial, health and personal situation and goals. For some, an annuity can be an appropriate part of an overall financial plan. For others, an annuity can be totally unsuitable. But, protect yourself. Annuities can be confusing. Get the facts!”

AnnuityTruth.com goes on to write, “among the disadvantages of deferred annuities can be high surrender charges during the initial years of a contract and the tax burden they can impose on heirs. With fixed annuities (deferred or immediate) inflation can eat away at the value of the locked-in fixed payments.”

With all that said, the notion that you can sell your annuity seems like an idea that makes so much sense that the real wonder is why it didn’t happen sooner.

While the secondary market presents significant potential to annuity owners, this newfound freedom confers upon you the responsibility to do some research and make the right choices. What follows are some tips and strategies to help you make the most of the opportunity to sell your annuity:

1. Understand the options from your carrier. Determine what options, if any, you have to cash out your annuity policy with the issuing insurance company directly. Learn if your immediate annuity has any cash value – in most cases, you won’t be able to get a lump-sum out of your annuity once the periodic payments have started. Learn if your deferred annuity has “surrender charges” which lowers the cash value or if you must take payments over a minimum of 5 or 10 to get the full value.

2. Contact a reputable buyer. You should learn the value of your annuity regardless of whether you intend to sell it. This information will help you be better prepared to adapt to life’s changes in the future. Get a free assessment of the value of your annuity policy directly from a reputable buyer in the secondary market. This should cost you nothing and should come with no obligations to sell your annuity. When it comes time to sell your annuity, you’ll want to work with a company that has a solid track record of providing service and value to annuity owners in this marketplace.

3. Consider how much of your current payment you really need. One of the real advantages of the secondary market is how much flexibility it offers annuity owners. You don’t have to sell your entire payment or the full term. You can sell just a portion. Suppose you have seven years left on annuity that’s paying you $7,865 a month, but you could do just fine with $5,150 per month for the next five years? You could sell $2,715 of your monthly payment for five years and get a lump sum of $132,000 while retaining $5,150 for that 60-month period and then regaining the full $7,865 for the remaining 2 years. With this lump sum you could pay for a grandchild’s education, buy a second home, pay bills, or invest in something different. At the same time, if you wanted to maximize your current cash value, you could sell the entire annuity, and that full value could be put to use in some other way to better suit your needs today.

4. Understand the tax impact. While annuities are good for many things, transferring wealth efficiently to your heirs is not one of them. Advisors often say: “don’t let your client die with an annuity.” It sounds morbid until you consider the following: annuities are considered part of your estate, so if your estate value is above the threshold, as much as 47% of your annuity could be lost to taxes. Consult with a tax professional because there may be other options to pass proceeds tax-free to your heirs outside of your estate.

Compounding the problem for annuities is the fact that all of the gains inside an annuity are passed to the beneficiary and will be taxed at the beneficiary’s ordinary income tax rate. Compare this to stocks, bonds or mutual funds. Because of the step-up in cost-basis, these instruments can pass onto your heirs without passing the tax burden for the gains along with them.

Obviously every situation is unique, so please don’t take this as tax advice. You should consult a tax professional regarding your personal situation and how the secondary market for annuities can help you with your estate planning.

The ability to sell your annuities may be met with such relief that the immediate reaction is to cash out. However, like any other investment, equal care must be taken when buying as well as selling.

[author bio]
Michael Vaughan is the managing director of J.G. Wentworth’s Annuity Purchase Program™. Mr. Vaughan has been a featured guest on The Wall Street Journal – This Morning, in addition to several other national and local radio programs. Mr. Vaughan has authored articles for many top trade publications to educate insurance and financial professionals on the annuity marketplace, in addition to being quoted as a leading industry expert in Time Magazine, Business Week, MarketWatch.com, Annuity Market News, Investors News, Dow Jones Newswires and the personal finance column of many of the country’s largest newspapers.

For more than 15 years, J.G. Wentworth has been purchasing annuities and structured settlements from individuals. During this time, the company has paid out more than $2 billion in cash to clients for the purchase of future payment obligations. The company’s annuity-backed notes are AAA by Standard & Poor’s and Aaa by Moody’s. Contact J.G. Wentworth toll-free at 800-535-0195 or Mr. Vaughan directly at 484-434-2387 or mvaughan@jgwentworth.com.