What Is Annuitization?
Annuitization is the step at which an annuity owner exchanges the accumulated value in their contract for a series of guaranteed income payments from the insurance carrier. Once annuitized, the contract moves from the accumulation phase to the payout phase, and the payments follow a schedule that cannot be altered.
Common Annuitization Options
When you annuitize, you choose from several payout structures:
- Life only: Payments continue for as long as you live, then stop. Provides the highest monthly payment but offers no death benefit if you die early.
- Life with period certain: Payments continue for your lifetime but are guaranteed for a minimum number of years (often 10 or 20). If you die before the period ends, payments continue to your beneficiary.
- Joint and survivor: Payments continue for as long as either you or a second person (typically a spouse) is alive.
- Period certain only: Payments are made for a fixed number of years regardless of whether you are alive.
Annuitization vs. Lifetime Income Riders
Many modern fixed indexed annuities include income riders that pay lifetime income without requiring formal annuitization. With a rider, you keep the contract in force and retain access to any remaining accumulation value. With annuitization, the insurance company takes ownership of the funds in exchange for the income stream.
Tax Considerations
A portion of each annuitized payment is considered a return of your original premium and is not taxable. The remaining portion, representing earnings, is taxed as ordinary income. The ratio is determined by the exclusion ratio, which is calculated at the time annuitization begins.