Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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Annuitization is the process of converting an investment into a fund that will disperse payments at a set period of time. The collection process defines what it means to annuitize an annuity. It is the phase after the accumulation process. It is the time to collect your money!

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You’ve been working since you were a teenager, stashing money away since you were 30, and now it is time to cash in your chips and collect your benefits. If you are considering investing in an annuity, take the moment to understand what annuitization means, and if this is a good investment vehicle for you.

Three players are involved in an annuity agreement: the owner, the annuitant, and the beneficiary. The owner is the purchaser(s) of the contract. They make the contributions and control the money during the accumulation phase. The annuitant is the person(s) who receives the scheduled payouts.

It could be the owner or someone else. It could even be more than one person. The beneficiary is the person or persons named to receive the annuity in the event of the annuitant’s death. In most cases, this is the insurance company and there is no beneficiary. However, joint annuities and other options are available.

Annuity Annuitization Options

There are several ways to annuitize an annuity. Of course, the option to receive a lump sum is available. Some people make the decision to roll their annuity over to another account in a lot of cases. If the decision is made to annuitize, the options are:

  • Lifetime
  • Period certain
  • Period certain/Life

The income for life, or lifetime option pays the annuitant until the time of death. If the annuitant does not outlive the life expectancy the remainder reverts back to the insurance company. In the case of a joint annuity both parties have to die before the life expectancy before the investment is issued to the bank.

The period certain allows the annuity to be passed down to a survivor in the case of death before the payouts are completed. Whether the scheduled payments are over a period of five, ten, fifteen, or twenty years, the appointed survivor will receive the benefits.

Period certain plus life guarantees the owner income regardless of whether they outlive the life expectancy or not. The period represents the 10, 15, or 20 years of scheduled payments. The beneficiary continues to receive payments even after the annuitant dies. With some exceptions, the beneficiary must alter the scheduled payments to be completed within five years.

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Which is the best option to annuitize an annuity?

The best option to annuitize an annuity depends on the owner or annuitant. Circumstances like a terminal illness or the age of the owner or annuitant may make a difference in options. If there are no family members or beneficiaries, you may opt for the lifetime option. The lifetime option may not be the best option for a deferred annuity.

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Fees & Expenses Associated With Annuity Annuitization

For every added feature to an annuity there is a fee. If the funds are accessed within the five year initial period, a 10% penalty may be assessed. A penalty may also be assessed when an annuity is offered as a gift. Maintenance and management fees also apply. Marketing becomes a factor in the case of variable annuities.

What happens if I die before my annuity life expectancy?

If the owner dies during the accumulation phase the beneficiary is guaranteed to receive what the owner accumulated while they were making contributions. After the accumulation phase the remainder goes to the bank, designated annuitant, or beneficiary. It all hinges on the type of annuity options taken.

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How do I cut my tax burden when I annuitize my annuity?

Taxes are applied at the time of withdrawal. The exclusion ratio determines how much is taxed once the payments begin. There are several ways to lower the tax burden for annuities. One way to minimize taxes is not to put all of your savings into the annuity. It may be a smart idea to reserve some of your savings for an emergency.

Another way to cut the tax burden is to limit the number of beneficiaries. There are other ways to leave money for the children and grandchildren. Some people save money by participating in a group annuity through the job.

The Complexity of the Annuity

The fixed or immediate annuity is the simplest form. There are more complex ways to own and annuitize an annuity. Some of those ways include:

  • Temporary annuity
  • Refund annuity
  • Deferred annuity

Although the number of payments remain the same, the initial payments may be less than expected based on the inflation rate. Enter your zip code in the search tool to learn more about how to annuitize your annuity and get free annuity quotes now!