For centuries, the insurance industry has provided consumers with two major foundations of financial stability: life insurance, which addresses the risk of dying too soon; and annuities, which address the risk of living too long. "Dying too soon" means passing away before you've built sufficient assets to provide for your family's needs when your income is no longer available. "Living too long" means outliving your assets, and is one of the greatest concerns expressed by seniors. They don't want to be destitute, and they don't want to be a burden to their family.
Reasons for buying (or selling) an annuity
Annuities serve a great purpose in the vast majority of circumstances. There are many specific reasons why clients may choose to purchase an annuity, but the top two purposes are usually to accumulate money for a long-term goal, or to guarantee a steady income stream for a certain period of time -- or for life. There is no other instrument that can guarantee an individual an income that he or she cannot outlive!
Over time, however, individual circumstances change, and the instrument that once was seen as a great source of cash flow may become merely an illiquid asset that restricts clients from achieving their current financial goals. When annuity owners decide to cash out and redeploy the current value of their annuity for other purposes, they can typically be categorized into four common groups.
Hardship -- Those who have suffered a hardship -- whether personal or financial -- and need cash today. This could be to stave off foreclosure, to cover medical expenses, to deal with a property loss (home or vehicle), or to deal with the effects of any number of other calamities.
Lifestyle -- Those for whom having cash today would be a better fit for their lifestyle. Perhaps, they would like to buy a boat or go on a vacation; or in the current environment of depressed real estate prices, maybe they have an investment opportunity they don't want to pass up.
Inheritance -- Those who have inherited an annuity and would rather have a lump sum instead of receiving monthly payments. While the income payments may have been the perfect solution for the original annuitant, a single lump-sum payment may make more sense for the beneficiaries.
Pre-annuitization -- Those who have not yet annuitized their contract, but who need or would prefer a lump sum rather than payments over time -- and who do not want to incur the surrender charges and loss of bonus interest credits.
What are your options?
If a need for cash from a client's annuity arises during the accumulation period, options include making partial withdrawals, with most annuities allowing them to take out up to 10 percent a year without penalty.
They also can elect to surrender the policy. To find out the surrender value, they can simply call the annuity company or their financial advisor. Their last option is to sell all or a portion of their potential income stream. The sale price may be more or less than the surrender value, ut particularly if the entire value of the annuity is not needed, a sale can provide a lump sum of cash now, plus ongoing annuity payments that resume after the period of payments that were sold has passed.
If a need for cash arises during the annuitization period, theoptions are definitely limited. As the client has already begun receiving an irrevocable income stream, they generally cannot tap the remaining annuity value by surrendering the contract. The only option is to sell some or all of the future annuity payments. While in some cases, the carrier may offer a commutation privilege (where the remaining policy payments are surrendered in exchange for a lump sum payment), more often, they will need to find a third-party to purchase future annuity payments. Again, the entire income stream can be sold, or just a portion of those payments, depending on specific needs.
Flexibility is the key
Someone has said that "life is what happens while you're busy making other plans." Helping clients in making financial plans that can be adapted to deal with changes that are encountered along the way is key to meeting their needs throughout life's various changes. Insurance carriers continue to develop new products and to modify existing products; and third-party firms continue to offer solutions to complement what's available from the insurance companies and to provide clients with solutions that are not encompassed in the carriers' product offerings.
We've seen the process work well in the computer sector, with innumerable vendors providing third-party hardware and software to augment the offerings of the IBMs and Microsofts of the world. And we're seeing creative solutions in the insurance world giving clients additional options not directly available from the carriers. Flexibility is the key, and it's important that clients consider all of their options when faced with important financial decisions.