What is an Annuity Lump Sum?
Annuities are a subject often misunderstood in the world of finance, as are lump sum payments of annuities. Often, people turn a blind eye to topics they feel are too complicated to understand. Luckily, this is a topic that is easily simplified and understood. To understand an annuity lump sum, however, you must first understand what an annuity is.
An annuity is simply an investment vehicle in which you place money that later pays out in installments, often monthly or yearly. These are most often purchased though insurance companies or investment firms by an individual; however, they may also be purchased for an individual as part of a structured settlement as an award in a lawsuit. The purpose of purchasing an annuity is most often to provide a steady income stream at a particular point in life.
For a detailed explanation of what an annuity is, please see the Wikipedia's entry on Annuities (US financial products).
Although arranging an income is an intelligent goal, some people find after purchasing an annuity, they would benefit more from having the cash back from the investment. Likewise, people often regret accepting a structured annuity as a settlement after it is too late to change their decision. This is where an annuity lump sum cash out comes in. When someone finds himself entitled to annuity payments, he has the option to sell those payments in exchange for a lump sum of money to an outside company. This is especially beneficial for someone that needs money quickly and is not in a position to wait months or years for an annuity to pay out.
Another reason people often utilize an annuity lump sum payout is to better invest the money that was previously in an annuity. These accounts often earn fairly low interest rates and may not grow as quickly as they could otherwise. Therefore, it may not be financial need that fuels the selling of an annuity; it may be wanting a better investment vehicle. Whatever the case, selling the annuity for a lump sum accomplishes either of these goals by providing money when needed for expenses or to reallocate to another type of investment.