An immediate irrevocable annuity is a type of insurance product that provides you with monthly income. If you win the lottery or are on the receiving end of some kind of cash settlement, you might receive annuity payments rather than a lump sum. If you want to switch your monthly payments for one big check you may be able to sell your annuity to an investor.
Immediate Irrevocable Annuity
When you buy an immediate annuity, you give a lump sum of money to an insurance firm. The insurance firm adds some interest to the money and thereafter you receive monthly payments that comprise both your original investment plus the interest. The process of converting a lump sum into an income stream is known as annuitization. You can't reverse this process. Worse still, immediate annuities are typically irrevocable, which means you can't change the terms of the agreement to have your payments redirected to someone else. If you die, your beneficiary may continue to receive the payments for a period of time but otherwise the contract is yours until it expires. Insurance firms usually sell annuities with terms of five, 10 or 20 years, although some firms sell lifetime annuities.
You can't alter the terms of an immediate irrevocable annuity agreement, but you can sell your interest in the contract to another party. Investment brokers match buyers seeking income with annuity owners who need an influx of cash. You must negotiate a price for the contract, and broker's fees erode your earnings. An investor won't buy your annuity unless the long-term income payments exceed the purchase price. Therefore, you get the lump sum of cash that you need in the short term, but in the longer term you lose money.
You can buy an annuity with qualified or non-qualified funds. Qualified funds are sums of money that have never been subjected to income tax, such as the money you hold in your 401k or IRA. Non-qualified funds are sums of money on which you have already paid income tax. You can sell a non-qualified annuity to another investor, but you can't sell a qualified annuity because, if you did so, you would be passing on your tax liability to that other investor. Aside from federal tax restrictions, annuity sales are also subject to state laws. You can't sell your annuity if your state's laws don't allow you to do so.
Buying an immediate irrevocable annuity may seem like a good idea at the time, but if you change your mind a few weeks later then all may not be lost. Most states have some kind of free-look provision for annuities. This means the insurance firm cannot annuitize your money at the time you purchase the contract. In Texas, the free-look provision lasts for 30 days beginning on the day you sign your contract. You can back out of the deal at any time before the free look ends, and your insurer must give you a full refund.
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