Typically, we hear about annuitization in life insurance. In exchange for receiving $500,000 in the event of death, for example, you might agree to annuitize the payment, receiving a series of small payments over a period of years.
The annuity may be more or less than the total value of the premiums, depending on the terms of the policy and how the investment of the premiums has matured over the years.
Sometimes, a policy is annuitized for a specific length of time. A life insurance policy may be annuitized for 25 years, for example. In other cases, a policy is annuitized for an indefinite length of time, with the policyholder agreeing to receive smaller payments every month until death.
You might choose to receive $5,000 per year indefinitely, for example, instead of receiving a $100,000 payment today.
Annuitization “Flips the Switch” and Lets You Start Taking Income from the Insurance Company
When you annuitize a policy, you’re effectively “flipping the switch” on your insurance company. You convert your account from something that grows into something that pays you.
Let’s say you pay into a life insurance policy over a period of many years. The policy has grown based on your payments and investments. Now, you annuitize the policy to provide you with income.
When you annuitize you set up a systematic payment plan. You tell your insurance company to start paying you.
Typically, you annuitize a policy by filling out a form. Then, you tell your insurance company how the payments should be structured. You can choose from annuitization options like:
Lifetime Payments: Lifetime payments are particularly popular with annuitization. Under the lifetime payments option, the insurance company agrees to make payments for as long as you live. The longer you live, the better this option works out. If you die shortly after annuitization, then you will not receive a refund of any of the principal amount.
Life with Period Certain: Some policyholders annuitize a policy under ‘life with period certain’ terms, where the insurance company makes payments for either the life of the annuitant or the period chosen, whichever is longer. Under a 10 year period certain plan, for example, payments might continue for 10 years regardless of whether the annuitant dies within the 10 year period.
Joint and Last Survivor: A joint and last survivor payment option provides income to either the annuitant or a surviving spouse. If one spouse dies, then the other spouse continues to receive annuitant payments.
Period Certain: Some people annuitize a policy under ‘period certain’ terms, where you receive income for a certain number of years regardless of anyone’s lifetime. You might agree to receive annuities until your Social Security or pension benefits become active, for example.
Other Options: Insurance companies have different annuitization options. Talk to your insurance company or a financial professional to determine the best option based on your unique financial needs.
Why Should I Annuitize a Lump Sum Payment?
Based on your financial needs, annuitizing a lump sum payment may or may not be in your best interests.
Some people appreciate the steady income of an annuitized policy. They secure a lifetime income.
Others appreciate a lump sum payment that allows them to pay off big bills today – like a mortgage.
Once you have made a decision about annuitization, you typically cannot change your mind. If you have annuitized your policy but now want a lump sum, then it’s unlikely you will be able to change it.
However, some policies do allow you to change. A policy that allows “commutation”, for example, may let you reverse your decision and collect a lump sum instead of annuitized payments, although you may have to pay hefty fees to do so.
Annuitization is the process of converting an annuity investment into a series of periodic income payments.
A policy can be annuitized into simple monthly payments. You receive a certain amount per month from your life insurance policy, for example, instead of receiving the full amount today.
We most often hear about annuitization in the life insurance world. After paying into a life insurance policy for many years, you might annuitize the policy and receive payments based on the amount invested over the years.