What is the 'Annuitization Method'

The annuitization method is a type of annuity distribution structure that gives the annuitant periodic income payments for the rest of his or her life, or a specified period of time. This is different than the systematic withdrawal method, in which the annuitant chooses the amount he or she would like to receive each month, until the balance in the account runs out.

BREAKING DOWN 'Annuitization Method'

Upon annuitization of his or her account, the annuitant effectively converts the entire savings in the account into an income stream. If he or she chooses the life option, the income stream is guaranteed by the insurance company to last the rest of the annuitant's life, even if he or she should live much longer than originally expected. Of course, the risk in choosing the life option is that, should the annuitant die sooner than expected, he or she will not receive the full value of the annuity account - the insurance company gets to keep the remainder of the account upon the annuitant's death. Most annuities, however, offer period certain options or spousal coverage, which can reduce the risk of the annuitant's funds not being sufficiently paid out because of an earlier-than-expected death.

Annuity Methods

The annuitization phase, also known as the annuity phase, is the period when the annuitant starts to receive payments from the annuity. This period comes after the accumulation phase where money is invested into the annuity. After retirement, annuities are rolled over from the accumulation phase to the annuitization phase, providing income for retirees. The more that was originally invested into the annuity, the more that will be received when the annuity is paid out.

This is the time when the choice of method comes into play: the annuitization method, the systematic withdrawal schedule, or the lump-sum payment. The annuitization method comes with the following considerations.

The life option typically provides the highest payout because the monthly payment is calculated only on the life of the annuitant. This option provides an income stream for life, which is an effective hedge against outliving your retirement income. The joint-life option allows you to continue the income to your spouse upon your death. The monthly payment is lower than that of the life option because the calculation is based on the life expectancy of both spouses.

With the period certain option the value of your annuity is paid out over a defined period of time of your choosing, such as 10, 15, or 20 years. Should you elect a 15-year period certain and die within the first 10 years, the contract is guaranteed to pay your beneficiary for the remaining five years. The life with guaranteed term option gives you an income stream for life (like the life option), so it pays you for as long as you live.

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