Bailing out of Unwanted Annuities

Rising Market in Purchase of Long Term Annuities

A fast-rising secondary market for people looking to cash in annuities for a lump sum settlement is causing consumers concern. Is this the perfect escape hatch for people locked into an annuity they don't want or yet another way for brokers to take advantage of seniors in dire financial straits? Of course, as with all financial tools, there is the possibility for both in each situation.

With an annuity, the buyer pays an insurance company a sum in return for regular payouts over a defined period. With more and more people owning or inheriting annuities, you can bet more and more people find themselves in a situation where they want out. Most annuities charge "surrender" penalties of up to 20% if the owner wants to withdraw the principal before a set period has expired. The penalty generally decreases with time.

Those fees have drawn a rash of complaints in recent years, especially from seniors, and senior advocates.

Into this muddle has stepped J.G. Wentworth, a company that got its start buying structured payments from court awards and the like. It now has 70% of the market for annuity settlements. The company offers anywhere from 7% to 11% below the annuity's total value as a lump sum. Whether that is a good deal depends on the particulars of your situation.

Whereas agents who sell annuities have an incentive, in the form of commission, to sell large policies, buying annuities for lump sums is the opposite. Agents collect a cut of the price, exactly how much is unknown, so their incentive is to get clients the most money for their annuity. Prices are set by the company, or, J.G. Wentworth, not the agent, and the discount from the full value is typically displayed prominently.

The market is new and growing and there appear to be few red flags about annuity settlements so far. Still, annuities are complicated to begin with and selling yours can have significant tax implications. Most advisors will ignore the benefit of annuitization, and you may miss an otherwise golden opportunity. See Income Annuities for Retirement Financial Security: Study Suggests Income Annuities Best Asset Class. So do your homework. Make sure you consult with a lawyer and financial advisor other than the advisor selling the settlement arrangement. The cash may come easy but you don't want to make a bad situation worse.