Why It Makes Sense to Convert Annuity Payments into a Lump Sum of Cash

Learn why it makes sense to turn your annuity payments into one lump sum rather than payments over time.

The easiest way to understand an annuity is to think of insurance in the reverse. Instead of making monthly premium payments to an insurance policy and receiving a lump sum upon your death, you instead invest a large sum of money upfront to receive payments over time. The difference of an annuity from a cash settlement, resulting from personal injury or other type of lawsuit, is that it will not be you that is putting up the huge lump sum of cash to purchase the annuity, but the person or company that owes you money.

Often times, during the legal proceedings in a lawsuit involving personal injury, a settlement will be agreed upon and offered to the injured party as an award for the damages they have incurred. An annuity will usually provide more money to the injured party in the sum of a monthly, quarterly or annual payment. In essence, the amount of money that is paid out every month is determined by the lump sum of cash in a one-time payment into an annuity. The profits that are generated will be paid by the percentage of interest it receives every month. The higher the interest rate, the higher the payment of the annuity will pay out over the years.

Types of Annuities

There are two basic types of annuities including those including term certain annuities, and life annuities. While they both pay out on a scheduled basis, they are different. Their differences include:

  • Term Certain Annuities – A term certain annuity will guarantee a set monthly income for the recipient that last for many years. Usually it will pay a scheduled amount until the individual is 90 years of age. If all the payments have not been paid out before death, all the remaining payments or lump sum will be made to the estate.
  • Life Annuities – A life annuity is set up to pay a specific amount every month, quarter, or year, until the recipient dies. At that time, no further payments will be made to the estate. However, there are other options that can be added to a life annuity policy that can make that happen.

As an example, an annuity can be set up to make payments to your living spouse upon your death. Additionally, an annuity can be purchased that will automatically increase the amount of income you receive based on current inflation rates. Typically, any extra option that is purchased toward the policy tends to lower the monthly payment.

Determining If It Is Worth Selling an Annuity

It is important to note that the annuity was probably set in place to guarantee an automatic income every month, year or quarter. However, it in nearly everyone’s life many situations change, including financial ones. When your personal or financial needs dictate a change, an annuity could be worth selling.

Some people might discover that their retirement years are not exactly how they were anticipated, and that receiving steady monthly payments does not help them meet their financial goals. During these times, it might make more sense to convert the annuity into a large lump sum of cash to either diversify their investments, give to their children, or use for other goals.

Some people choose to convert their annuity into a lump sum of cash to pay down medical debt, take a vacation, or build an addition on their home.

Many individuals acquire an annuity from an inheritance. They may not desire or need to have a monthly income, but could certainly use a large sum of cash. Whatever the reason, converting annuities, structured settlements, real estate notes and other financial vehicles into cash is easy, when performed by an experienced, knowledgeable professional. Before finalizing any paperwork on converting an annuity it is important to be fully informed to make the best decision on exactly how much the policy is worth.