During a bear market, waiting for a stream of future cash flows from an issuer with questionable solvency can be a nerve racking situation. If you are concerned with an issuers credit worthiness, you can use different financial products to hedge exposure to the issuer (buying put options, inverse ETFs or even credit default swaps). Three ways you may want to consider getting cash up front are an annuity transfer, life settlement and a cash-out refinance.
Selling Annuity Payments for Lump Sum Cash
With so much interest in investment income in a low interest rate environment, especially variable or indexed annuities, you may want to consider transferring your annuity to an investment or even selling your annuity outright for cash. Maybe your investment strategy has changed and you realize (as in the case of indexed annuities) that you have too much exposure to the stock markets. Further, if you fear your employment may be in jeopardy or you’ve already lost your job, waiting for a stream of income (which may not have even started yet if you have a deferred annuity) can be frustrating.
You may also fear that your insurance company might become financially insolvent. Even if the policy is back-stopped by some third party or legal promise, if economic conditions get tight enough, you could still end up with delayed or reduced payments. The nice thing is you can get a quoted cash value for your annuity over the phone in a few minutes (without committing to anything). With a sale, it doesn’t have to be all or nothing- you can do a partial sale. There are dedicated annuity buyers who may be willing to pay 75-80 % of the cash up front in a lump sum. Funding of transactions typically occurs within two or three weeks following a signed contract.
If you are going to sell, you don’t want to wait until a crisis is on, because the bids from annuity buyers will probably drop as more people will want to cash in their annuities as they fear their insurance companies are in trouble or they encounter unexpected financial needs.
On a transfer you can automatically, reducing your fees by converting the underlying investments into lower cost ETFs instead of the presumed mutual funds. You may have paid, or may still be paying, high fees on your annuity and simply want to transfer the annuity into an investment portfolio that will provide you with a future stream of income but with lower fees.
Life Insurance Settlement
Most of us have made the responsible decision to purchase a life insurance policy to protect our spouse and children in case of an accident. But we may have reached a point where a policy is no longer necessary, the kids have grown, etc. Or maybe you’ve encountered an unexpected financial need such as long-term care. When this occurs, some people surrender or cancel the policy. What many people don’t realize is that life insurance policy holders can actually sell those policies for cash. It’s called a life settlement and it can provide a lump sum of funds in a time of need. Some estimates indicate you could receive up to 4 times more money by selling your life insurance policy rather than surrendering or cancelling it. You may also be able to retain a portion of your coverage which lowering your monthly premium payments if you find yourself in a cash-flow crunch.
What is a ‘Cash-out Refinance’?
If you have been considering getting some upfront cash through a cash-out refinance, or a reverse mortgage you might consider beginning the process sooner than later. Banks, who will be supplying these funds to you in the form of loans, could become dangerously low on capital if we endure a serious bear market in stocks and bonds leading to a frightening bout of deflation. Banks are not as well-capitalized as many think, even with Tier One Capital Requirements, and they will begin to pull in the reins on lending if credit tightens because of a severe economic slowdown.
At that point, obtaining a cash-out refinance, reverse mortgage or line of credit may prove next to impossible. Since the amount of your available cash-out refinance depends on the equity in your home, it might make sense to extract equity from your home now if you fear home values and real estate are going lower once again. A rising interest rate environment makes that fear a viable scenario. If you have already have credit available on a credit line that you need to use for an important situation, you might consider tapping it sooner than later.