Annuitization

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There are insurance products into which you pay into either in a lump sum or over a period of years at either a fixed or variable rate, which yield a lump sum at the end of the period of coverage. This lump sum is known as an annuity.annuitization

This annuity may be more or less than the total of the premiums, depending on the terms of the policy and how the investment of the premiums has matured in the market in which it has been invested.

What is annuitization?

It is the process by which all or part of a lump sum is converted into regular payments instead of a lump sum. This may either be payments that are paid for a defined period, such as ten years or for the lifetime of the policy holder.

How do I annuitize?

This depends on the nature of the policy and the terms within it, some policies allow you to choose when and how annuitization works others have mandatory terms. You should review your insurance contract to better understand how this will apply to your policy, or talk directly with your insurer.

Why would I want to annuitize?

This is a question only you can answer; there are benefits to drawing a single annuity particularly for single individuals. The lump sum can be used to secure a lifetime income or alternatively it can be used for a lump sum payment such as paying off a mortgage which may be beneficial.

However many annuitized policies enable benefits to be passed onto another beneficiary if you should die during the term of the annuitization and this may be of considerable benefits to couples.

What if I change my mind?

The vast majority of policies do not allow you to change your mind. Once you have annuitized your policy it is normally irrevocable and you cannot rescind your decision and collect a lump sum.

There are policies now available, though they are rare, that allow for “commutation” which enables you to reverse your decision and collect a lump sum, but this process is normally expensive and involves paying stiff penalty fees.

Conclusion

Annuitization is a handy option for policy holders who wish to achieve a guaranteed level of income, and who wish to allow their insurance company to shoulder the responsibility for that income. Annuitization is not for every policy holder and care should be taken before selecting the appropriate option for your scenario.

Additional Annuitization Definitions

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