Selling Your Variable Annuity
(What you need to know before you do)
Written by
Jeff Green has held a variety of sales and management roles at life insurance companies, Wall street firms, and distribution organizations over his 40-year career. He was previously Finra 7,24,66 registered and held life insurance licenses in multiple states. He is a graduate of Stony Brook University.
Reviewed by
Neel Lane is an independent contract paralegal who specializes in Medicaid and VA benefits. He helps people access and maximize the benefits that they're entitled to. He has over 30 years of experience in this area.
If life throws you a curve, getting money out of your variable annuity before retirement may not be easy. Selling your variable annuity may be an alternative, but it can be costly. Here’s what you need to know.
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How to Sell Your Variable Annuity
There are two ways to sell your variable annuity: surrendering it to the company you bought it from, and selling payments you are receiving to a third party. When you surrender your annuity, the insurance company will pay you the account value less any surrender charges.
When you sell payments to a third party called factoring companies, they will pay you a lump sum that reflects a discount rate.
How Much Do You Surrender Your Variable Annuity For?
Most variable annuities have a surrender charge for 7 to 10 years. If you are within that surrender period, you will be charged anywhere from 1% to 10% of the annuity account value.
Uncle Sam will tax any gain you have at ordinary income tax rates. And he’ll charge you an additional penalty of 10% if you are under 59 1/2 years of age.
How Much Do You Sell Your Variable Annuity Payments For?
If you are receiving or are eligible to receive payments from your variable annuity, you can sell them to a third party. The factoring company will pay you a lump sum that is less than the value of your payments by charging a discount rate. The higher the rate, the lower the payment.
Factoring companies may also charge administrative and legal fees.
Uncle Sam will still tax the gain in the annuity, and if you are younger than 59 1/2 years of age, charge you a 10% penalty.
Why You Can’t Sell Your Variable Annuity
If your variable annuity is part of a pension plan or IRA, you cannot sell the payments to a third party. You can surrender the annuity, but you will pay tax on the proceeds and a penalty if you are under 59 1/2 years of age.
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When Should You Sell Your Variable Annuity?
Variable annuities are a valuable retirement asset. For most people, selling their variable annuity should be a last resort to raise funds because of the cost.
Before you surrender or sell your annuity, make sure you know what the charges and tax consequences are.
- Determine the gain in the variable annuity from your current statement
- Find out what the surrender charge is
- If you are selling payments, be sure you know the discount rate and all other charges
Don’t Go It Alone
Selling or surrendering your variable annuity is a complicated transaction. Independent insurance agents are annuity professionals, and they have the experience and knowledge to help you make a smart decision.
advisor’s guide to annuities John Olsen
IRS Pub 575
IRS Pub 410
IRC 72
Consumer reports money advisor march 2010