Understanding exactly what an annuity is certainly isn’t easy, and if you’re thinking about selling your annuity or selling your structured settlement, then you might be feeling just a bit overwhelmed. To help you out, here are just a few important terms and phrases you’ll need to know about annuities:
- Annuity: This is a financial agreement between an individual and an insurance company where the individual purchases an annuity for a certain amount of money, and the company ensures that a certain amount will be paid back to the individual either all at once or throughout a payment period (usually lasting 25 years).
- Deferred Annuity: An annuity that begins only after the final premium has been paid. As of 2013, there were around 34.8 million individual deferred annuities in place.
- Immediate Annuity: This is pretty straightforward; you can buy an immediate annuity by “investing” a lump sum of money into the insurance company and then begin receiving payments immediately.
- Fixed Annuity: The company agrees to pay back a specific amount of money to the individual within a certain number of payments.
- Variable Annuity: This is a riskier type of annuity, and generally isn’t recommended for anyone who doesn’t have other secured funds. With a variable annuity, your payments could vary depending on the current market value of your investment.
- Annuity Settlement: This is an annuity that you receive if you’re given financial compensation in a personal injury settlement agreement. Annuity settlements are often preferable over lump sums in an accident case, especially if you don’t have experience managing a lot of money. In fact, it’s estimated that 25-30% of settlement lump sum recipients use up their funds within two months.
- Lottery Annuity: If you win the lottery, you have two choices of your payment method: either receive a lottery lump sum payout all at once, or receive annuity payments (usually over the course of 30 years).
- Annuity Contract: An annuity contract is your agreement with the insurance company that outlines the terms of your annuity. It will state all of the details of your payments and payment schedule. If you break your contract and take your payments early or take larger payments than what your contract outlines, you’ll have to pay a fee.
- Cash Surrender Value: This refers to the amount of money that you’ll receive if you break your annuity contract early. In most cases, you’ll be hit with some pretty high penalties for breaking your contract, so your cash surrender value will be much lower than what your total annuity amount is.
- Guaranteed Payments: With some annuity agreements, you can ensure that if you die before receiving all of your payments, another specified recipient can continue receiving those payments in your stead.
- Lifetime Payments: This ensures that you’ll continue to receive payments for your entire life. The downside, as many people have discovered, is that a lifetime payments agreement could mean you won’t receive as much money in each payment.
- Tax Deferral: This means you can hold off paying taxes on a specified amount of money, and it’s a benefit of getting an annuity. Unlike investing money in other assets, you don’t have to pay taxes on any money which you’ve invested into an annuity. You will, however, have to pay income taxes on the payments you receive because they are technically considered part of your income once you have control over them.
The fact is, selling your annuity settlement can be one of the best decisions for your financial future — and there’s no reason to keep yourself from selling your annuity payments just because you aren’t sure what all the terminology means!