Variable Annuitization

DEFINITION of 'Variable Annuitization'

An annuity option in which the amount of income payments received by the policyholder will vary according to the investment performance of the annuity. Variable annuitization is one option that can be selected by the policyholder during the annuitization phase of a contract, which is the phase in which the policyholder begins making systematic withdrawals over a fixed period of time.  

BREAKING DOWN 'Variable Annuitization'

There are two phases to the life of an annuity. During the deferral phase an investor adds into the annuity, with all earnings that accrue during this phase being exempt from income tax. Once a policy holder is ready to start withdrawing funds from the annuity the phase changes from deferral to annuitization, and the investor can choose to either take fixed or variable payments. During the annuitization phase, the funds withdrawn are treated as income rather than capital gains. The complexity of annuity income tax treatment is greater with variable annuities than with fixed annuities.

Choosing how to receive payments from an annuity can be a difficult choice for investors, and often comes down to the amount of risk the policyholder is willing to take compared to the amount of returns the policyholder wants. Choosing a fixed annuitization means that the policyholder will receive the same amount of money over the life of the annuity, regardless of how the portfolio of the annuity company performs. Variable annuitization payments differ in that the value received by the policyholder can vary from time to time. This is because the payments are based off of the performance of an underlying portfolio.

Purchasing an annuity can provide a level of income security, but can also lock in funds into a specific product that may not perform as well as expected. Professionals who sell annuities typically receive a commission based on the type and value of annuity sold.