YOU ASK:

When does annuitization take place?

WE ANSWER:

If selected as an annuity nonforfeiture option, annuitization occurs at the end of an annuity's accumulation period and it marks the onset of the liquidation period. This settlement alternative is not very common and is mainly used for fixed annuities.

How Annuitization Works

Except for immediate annuities where payout and accumulation take place almost simultaneously, every annuity goes through two major periods. During the accumulation period, the principal earns interest which can be either fixed, as in fixed annuities, or contingent on the investment performance of a stock market index, as in variable annuities.

When the liquidation, or payout, period starts every annuity buyer can choose from a list of several settlement options. This is the moment when annuitization takes place. The cash value accumulated during the accumulation period is converted into a stream of periodic payments, which are paid to the annuitant as a guaranteed lifetime income.

For fixed annuities, the periodic payments remain fixed for the rest of the contract and are not subject to change, thus providing little or no hedge against inflation.

The payout under a variable annuity can vary according to the investment performance of the principal.

For a fixed annuity, the cash value accumulation is simply annuitized, i.e. it is converted into a stream of periodic payments using actuarial principles that take into account the expected longevity of the annuitant, interest earned by the principal balance during the annuity payout period, and related factors.

Settlement Options Other Than Annuitization

There are settlement alternatives other than annuitization. These include the following:

  • Lump sum withdrawal;
  • Life annuity (no refund) - the annuitant receives lifetime income only while alive;
  • Life annuity with period certain - there is a certain number of guaranteed payments which can be received by the beneficiary if the annuitant dies during the designated period.
Was this question and its answer useful?
Not a bit
  • Currently 2/5 Stars
  • 1
  • 2
  • 3
  • 4
  • 5
Very useful
Have a question about insurance? Ask the experts
Share: