Annuities are popular financial products for a variety of reasons, but most notably because they are designed to provide a steady stream of income over a specified period of time. As such, many people like investing in annuities because of the guaranteed aspect of them. However, guaranteed payments over time doesn’t work for everyone, and so there could come a time when you need to sell.
How an Annuity Works
An annuity works by taking an amount of money up front in exchange for the guarantee of payments for a specified period of time, or in some cases, life. Annuities are an insurance product, and their payments are guaranteed by the insurance company who issues the annuity.
The best way to illustrate this is through an example. You can buy a $1,000,000 annuity today, and it will guarantee you monthly payments of $1,500 per month for life. This is about a 1.8% annual return on your money, which is low, but not terrible. The insurance company makes money by trying to use your initial deposit to earn a better return, and thus pocketing the difference.
Times You Should Consider One
People who want steady, guaranteed income are the ones most likely to consider an annuity. Since an annuity provides steady monthly payments, it is also less risky that using an investment portfolio to get income from. This is helpful in retirement.
When You May Consider Selling
However, there may come a time when you need a lump sum, and you don’t need monthly payments anymore. That’s when selling annuities comes in handy. You can sell your future payments to a company in exchange for a lump sum at any time. The catch is that you will get less than the sum of your future payments – usually substantially less.
However, if you’re financial situation has changed since you signed up for the annuity, this could be a good way to infuse yourself with cash when you need it.