6 Expenses for Annuitization

Annuitization is the process of converting an annuity investment into a series of periodic income payments. In this guide, we'll cover the various payment options available for contract annuities.

The first thing to know is that the option can be an annuity in almost every annuity contract. Single Premium Instant Annuity, Two-Tier Annuity and Structured Settlement are the 3 types of contracts that force you to retire your retirement savings annuity. The fourth possible annuity contract requiring an annuity is a deferred income annuity, but in most products, people can cancel the contract before canceling the annuity, so there is no mandatory income.

Second, you should know that once you have an annuity on your contract, there is no turning back. The conversion is irrevocable, which means that you cannot cancel the contract or get your money back (in most cases).

Third, the income increaser or guaranteed lifetime claim of equity is not an annuity form.  

So let's take a look at your options.

Annuity payment options

Fixed term (a certain annuity period)

Annuity payments are allocated to you within a fixed period of time.

In most cases, you can choose a period of between 5 and 30 years.

If you die before the end of the fixed term, the payment will continue to be paid to the beneficiary you designate until the term expires.

Because the annualization rate is low, you'll basically pay off your money over time, and so far the interest rate is about 1.25 percent.

Single Lifetime Income (Lifetime Annuity)

Annuity payments will be allocated to you for the rest of your life until you die.

Usually, the heirs have no compensation for death.

Lifetime payments are usually the highest distribution of all annuities.

Union and Survivor (Couple Annuity) 

Guarantee your life until death. 

At the time of your death, the surviving spouse will continue to receive an annuity for the rest of your life.

People can choose whether to reduce payments (from 50 to 100 per cent) for surviving spouses in exchange for higher annuity payments.

After the death of the surviving spouse, there is usually no compensation for death.

Lifetime Guaranteed Income

Your annuity payment will be paid to you until the date of your death, with a guaranteed period of time as a backup plan for your premature death.

If an annuity (you) dies before the guaranteed term expires, the payment will continue to be paid to the beneficiary you designate until the term expires.

Think of it as a mixture of "single life" and "fixed time period".

This payment option can also be applied to joint and survivor payments.

Lifetime refund

Annuities will be paid for the rest of their lives before their death.

If the annuity (you) dies before the original investment is received, the difference will be paid to the designated beneficiary in one lump sum.

Lifetime of installment refunds

Similar to lifetime cash refunds, annuity payments are allocated to the annuity person for the rest of their lives.

If the annuity dies before the original investment is returned, the difference will be paid in instalments to the designated beneficiary until the original investment is repaid.

Inflation

Most annuities allow you to choose your Cost of Living Adjustment (COLA) your annuity payment.

Payments will start less than most payments, but will increase each year, thus simulating inflation.

In most cases, you can choose to receive an increase each year.

Tax advantages

Unqualified annuities

Since the non-conforming annuity is purchased with "after-tax" money, only the interest portion of the annuity payment is taxable.

Under current tax laws, a portion of each annuity payment you receive is a return on the original principal, which means that one portion of your annuity payment will be taxed and the other part not required.

Qualifying Annuities

Typically, payments you receive are taxed in full because funds have not yet been taxed. 

Because the annuity will be allocated to you over time, you will also be assigned a tax liability over time (rather than a one-time payment).

Deferred Annuity Payments (not immediately) Annuities Over time, when you start collecting annuity payments, your tax rate may be reduced.

Disadvantages

Annuity payments are irrevocable, which means you can't "turn off" income once you "open" it.

The interest earned is ridiculously low.

Ask questions a lot

Why should I have an annuity?

You will be guaranteed income for the rest of your life or for a fixed period of time. People should consider annuities as another layer of retirement income to supplement social security income.

What will the beneficiary receive if an annuity dies before an annuity occurs?

Typically, the account value of the annuity is paid to the designated beneficiary in one lump sum. Having said that, there are some annuity contracts that will allocate the value of the annuity over a fixed period of time.

Can you change your mind after an annuity?

No. The decision on an annuity is final. You can't switch annuity payment options. In most cases, you will also not be able to withdraw additional funds from your annuity. In emergency situations, there is always liquidity of additional funds.