Selling an annuity is possible but comes with real costs and tax consequences you need to understand first
You can sell an annuity, but the process is not straightforward and rarely nets you the full remaining value. When you sell an annuity, you are selling your right to future payments to a third-party buyer — usually a factoring company or structured settlement purchaser. That buyer will pay you a lump sum now, but it will be less than the total of the payments you would have received, sometimes significantly less. The difference is their profit for taking on the risk and waiting for those payments.
Before you sell, you need to know what type of annuity you own, what your contract says about selling, and what the tax bill will look like. Some annuities cannot be sold at all. Others have surrender charges that eat into what you receive. And the IRS treats the sale as a taxable event, meaning you may owe income tax on part of the proceeds.
Key Takeaways
- A structured settlement annuity can be sold to a factoring company, but a deferred annuity you bought from an insurance company usually cannot be sold to a third party — you can only surrender it back to the issuer.
- Surrender charges, which are fees the insurance company takes if you cash out early, can reduce what you receive by 5 to 10 percent or more depending on how long you have owned the annuity.
- The IRS taxes the gain portion of an annuity sale as ordinary income, and if you are under 59½, you may also owe a 10 percent early withdrawal penalty.
- A court must approve the sale of a structured settlement annuity in most states, and the buyer will conduct a financial review to confirm you understand what you are giving up.
The difference between structured settlement annuities and commercial annuities
The type of annuity you own determines whether you can sell it at all. A structured settlement annuity is one you received as part of a lawsuit settlement or workers' compensation claim. These can be sold to a factoring company, though a court must approve the sale. A commercial annuity is one you bought directly from an insurance company as an investment or retirement product. These cannot be sold to a third party — you can only surrender them back to the issuer, and you will pay surrender charges.
If you own a structured settlement, the buyer will contact the insurance company that issued the annuity to confirm the payment schedule and your ownership. If you own a commercial annuity, your only option is to contact the insurance company directly and ask about surrender or early withdrawal terms. Do not assume you can sell it to someone else.
Understanding surrender charges and what they cost you
Most annuities, especially commercial ones, have a surrender period — a window of time during which the insurance company charges a fee if you withdraw money or cash out early. Surrender charges typically range from 5 to 10 percent of the amount you withdraw, though they can be higher. The charge is highest in the first year and decreases each year until the surrender period ends, which can take 5 to 15 years depending on the contract.
If you are still in the surrender period and you cash out your annuity, the insurance company will subtract the surrender charge from what you receive. For example, if your annuity is worth $100,000 and you are in year two of a seven-year surrender period with a 7 percent charge, you will owe $7,000 to the company, leaving you $93,000 before taxes. Check your annuity contract or call the issuer to find out when your surrender period ends and what the current charge is.
How the IRS taxes annuity sales
When you sell or surrender an annuity, the IRS treats it as a taxable event. You will owe income tax on the gain — the difference between what you paid into the annuity and what you receive. The gain is taxed as ordinary income at your regular tax rate, not at the lower capital gains rate.
If you are under 59½ and you withdraw money from a deferred annuity, you also owe a 10 percent early withdrawal penalty on the gain portion. This penalty does not explore to structured settlement annuities or to annuities you own through a may have access to retirement plan like an IRA, but it does explore to most commercial annuities bought outside a retirement account. The buyer or the insurance company will report the sale to the IRS on Form 1099-R, and you will report it on your tax return.
To estimate your tax bill, you need to know your cost basis — what you originally paid into the annuity. If you do not have this information, contact the insurance company or the original settlement administrator and ask for a statement showing your contributions and the current value.
Steps to sell a structured settlement annuity
If you own a structured settlement annuity and want to sell it, the process involves a factoring company, a court, and your state's laws. Here is what happens:
- Contact a structured settlement factoring company. Search online for "sell structured settlement" or "structured settlement buyer" to find companies that operate in your state. Get quotes from at least two or three companies, as they offer different prices for the same annuity.
- Provide the factoring company with your annuity contract and payment schedule. They will review it and give you a quote for what they will pay you now. This quote is always less than the remaining value of your payments.
- Review the quote and the purchase agreement carefully. The agreement will show the discount rate the buyer is using and how much you will receive after their fees. Do not sign anything until you understand the numbers.
- Hire a lawyer or contact your state's court to file a petition for approval. Most states require court approval before a structured settlement can be sold. The court wants to confirm that the sale is in your best interest and that you understand what you are giving up.
- Attend a court hearing if required. The judge will ask you questions about why you want to sell and whether you understand the consequences. Be honest and clear about your reasons.
- Once the court approves the sale, the factoring company will send the money to you, usually within one to two weeks. The insurance company will stop sending you annuity payments and will send them to the factoring company instead.
What happens when you surrender a commercial annuity to the issuer
If you own a commercial annuity and want to cash it out, you cannot sell it to a third party. You must contact the insurance company directly and ask to surrender the contract. The company will calculate the surrender value, which is the current value of your annuity minus any surrender charges and any outstanding loans against the contract.
Call the customer service number on your annuity statement or policy document. Tell them you want to surrender the contract and ask for a written statement showing the surrender value, the surrender charge amount, and the net amount you will receive. Ask how long the process takes — it is usually 30 to 60 days. Once you sign the surrender paperwork, the company will send you a check and will close the contract. You will receive a Form 1099-R showing the gross amount and the taxable gain, which you will report on your tax return.
Why buyers pay less than the remaining value
When a factoring company buys your annuity, they are buying the right to receive your future payments. They pay you a lump sum now, but they will not receive the full amount of those payments for years or decades. The difference between what they pay you and what they will eventually receive is their profit.
The discount depends on several factors: how long until the payments end, how large each payment is, current interest rates, and the buyer's cost of capital. A buyer might offer you 60 to 80 cents on the dollar for your remaining payments, depending on these factors. This is why it is critical to get multiple quotes and to understand the math before you agree to sell.
Frequently Asked Questions
Can I sell part of my annuity instead of all of it?
Yes, if you own a structured settlement. You can sell some of your future payments and keep others. A factoring company will quote you on a partial sale. Commercial annuities are usually all-or-nothing — you either surrender the whole contract or keep it.
What if I need the money but do not want to sell?
Some annuities allow you to take a loan against the contract value without surrendering it. Contact your insurance company and ask whether your contract permits loans. This avoids surrender charges and may have lower tax consequences, though you will owe interest on the loan.
How long does it take to get the money after I sell?
For a structured settlement, the process takes two to four months because of the court approval step. For a commercial annuity surrender, the insurance company usually sends the check within 30 to 60 days of receiving your signed paperwork.
Will I owe taxes on the entire amount I receive?
No. You owe taxes only on the gain — the amount above what you originally paid into the annuity. The IRS considers your original contributions a return of your own money and does not tax that portion. The buyer or insurance company will report the taxable gain on Form 1099-R.
What if the annuity is part of a court-ordered settlement and I cannot find the original paperwork?
Contact the settlement administrator or the law firm that handled your case. They have records of the settlement and can provide copies of your annuity contract and payment schedule. If you cannot locate them, the factoring company can often request the documents directly from the insurance company.