What Does It Mean to Annuitize?

Should You Annuitize? Lifetime & Other Options

Nest Egg
When you annuitize, you turn your savings into payments. Chris Clor/Blend Images/Getty Images

To annuitize is to "flip the switch" and start taking income from an annuity. You convert your account from something that hopefully grows (either by making new additions to the account or letting interest payments billed up) to something that provides income. But annuitization is different from making a simple withdrawal. When you annuitize, you set up a systematic payment plan.

If your annuity is an immediate annuity, you essentially annuitize from the beginning.

What Happens When You Annuitize?

When you annuitize, you tell the insurance company to start paying you, typically by filling out a form. When providing these instructions, you'll need to decide exactly how the payments should be structured. For example, you might have the option to choose from several programs, and you should read your annuity contracts carefully to see which option is best for you.

Lifetime payments: the simplest option for annuitization is a lifetime payment. With this option, the insurance company continues to make payments for as long as you live (technically they last until the annuitant dies – the annuitant might be the same person as the annuity owner, but that’s not always the case). That could happen one year after annuitizing, or many years later. Generally, the longer the annuitant lives, the better this option works out. If the annuitant dies shortly after annuitizing, there is no refund of your principal under a basic lifetime payment option – and some people hate the idea of letting an insurance company keep all that money.

There are other options that address those concerns.

Life with period certain: to guard against the risk of forfeiting all of your money when somebody dies early using a lifetime payment option, you can add a "period certain." With this option, the insurance company will make payments for either the life of the annuitant or the period that you choose – whichever is longer.

For example, you might use a 10 year period certain. In that case, payments will continue for at least 10 years no matter when the annuitant dies (and payments will continue as long as the annuitant is alive, even if that is much longer than 10 years). Because you are reducing your risk of an early death, your monthly (or annual) payments will be smaller if you use a period certain as compared to a plain-old lifetime payment.

Joint and last survivor: some annuity owners want to provide income not just for themselves, but also for somebody else (such as a spouse). A joint and last survivor payment option will provide income as long as either of the people you choose remains alive. Again, this results in a lower payment than a standard lifetime payment because with two people, there's a greater likelihood that one of them will live for many years.

Period certain: you don't necessarily have to use somebody's lifetime when you annuitize. If you simply want to get income for a certain number of years (until your Social Security or pension benefits kick in, for example), you can instruct the insurance company to pay you for a set number of years. Of course, a shorter period results in larger payments.

Other options: different insurers offer different options. Talk with your agent or a customer service representative at your insurance company to find out about any other options.

Which option is best? It depends on what you're trying to accomplish. For example, if you're only taking care of yourself (and any other dependents do not rely on the assets in your annuity), annuitizing with a lifetime payment option will give you the largest payment. However, you always need to consider what will happen if you (or the annuitant, if that somebody else) die. How will others be affected financially? Do you want beneficiaries to receive anything from the annuity after your death?

Annuitizing is typically an irrevocable decision – once you make the choice, it's difficult or impossible to go back. The insurance company takes steps to manage their risk and keep up their end of the bargain, and it's difficult to unwind the complex transactions that make this possible.

Should You Annuitize?

Remember that annuitizing is just an option. Most annuity holders never even do it. Instead, people tend to use an annuity for a while and then take the money elsewhere (possibly cashing out, or just making lump-sum withdrawals if the need arises). The main reason to annuitize is to get a guarantee (from the insurance company – there's no government guarantee) of a certain payment structure.

Return to the Annuities Overview page.

Important Information

This information is general in nature, and cannot be considered financial advice. Speak with your insurer to understand the details of your contract, as terms may vary. Speak with a local financial planner and an insurance agent properly licensed in your state to discuss your personal financial situation in detail before making any decisions.