6 Annuitization Payout Options & How They Work

Share:
Annuitization Options Explained: Picture of My Annuity store Billboard with City Skyline Background

What is Annuitization and How Does it Work?

Annuitization is the distribution phase or “Pay-Out” phase of an annuity. Annuitizating an annuity contract converts a lump sum into an income stream generating a series of income payments guaranteed for life or a certain period of time. 

This guide will help you decide if annuitization is right for you, and if so, what option would be best for you. 

Annuitization period:

  • Income generated from a lump sum
  • Money from the accumulation period or from an inheritance, lottery winnings, or court settlements
  • The money belongs to the insurance company

Parties involved in an annuity contract

There are four parties involved in an annuity contract:

  1. contract owner,
  2. annuitant,
  3. beneficiary, and
  4. insurance company

Annuitization Payout Options

There are six annuitization payout options which fall into two categories:

  1. life annuities, which have a payment that is guaranteed to last for at least as long as the annuitant lives; and
  2. temporary annuities (or period certain annuities), which do not.

Types of annuitization options

  1. Period Certain
  2. Life Only
  3. Life with a cash refund
  4. Life with an installment refund
  5. Joint Life
  6. Joint life with a cash refund

Period Certain Payment Option

A period certain payment option guarantees payments for a certain period of time. For example, a 10 year period certain payment option would pay you a specified amount each month for 10 years. At the end of the 10 year contract payments would stop.

Period certain payout options guarantee that the payments will be made for 10  years. If should die during the 10-year period your beneficiary would receive the remaining payments.

Life Only Option

Under the life-only option, sometimes called a pure life income, payments stop when the annuitant dies, regardless of when that occurs; one month or 20 years.

The advantage of the life only option is that it pays the highest monthly income amount because there are no other contingencies and only the annuitant’s life expectancy was considered to determine the amount of the monthly payout.

The disadvantage of this selection is that the annuitant may die before their life expectancy and the total payout they received was much less than the total amount paid into the contract.

The life-only annuity payout option is also referred to as:

  • straight life,
  • pure life, or
  • life—no refund

Life with Cash Refund Option

Under the Life with Refund option, if the annuitant dies and the total payments received are less than the amount paid for the annuity, the beneficiary will receive the payments until the difference is paid.

 

  • continuation of payments in the same amount as was being paid to the annuitant (owner)

Life with Period Certain Annuitization Option

Life with a period certain option also pays an income for as long as the annuitant is alive. In addition, the annuitant selects a payment period, typically 5, 10, or 20 years, and payments are guaranteed to be made for at least that number of years.

If the annuitant dies before the end of the selected period, payments continue to the beneficiary for
the rest of the period certain. No payments are made to the beneficiary if the annuitant lives past the period certain.

 

Life—Period Certain

  • Income for life as long as you live
  • Choose a period such as 10 or 20 years
    • The annuity will pay the beneficiary if the annuitant dies within that period

Joint Life Annuity Payout Option

With the joint-life option, the insurer promises to make payments until the last survivor of two annuitants dies. For example, if the two annuitants were a married couple and the husband died first, payments would continue to the spouse for the rest of her life.

The owner can choose for continued payments in the same amount for the survivor, or in a lesser amount such as two-thirds or one-half of their monthly payout.

Joint Life and Survivor

  • One dies
    • Payments to surviving spouse until their death
      • Same or reduced

Joint Life with a Period Certain

Joint life with a period certain option also pays an income for as long as either annuitant is alive. In addition, you select a payment period, typically 5, 10, or 20 years, and payments are guaranteed to be made for at least that number of years if both annuitants die prior.

If both annuitants die before the end of the selected period, payments continue to the beneficiary for
the rest of the period certain. No payments are made to the beneficiary if the annuitant lives past the period certain.

Joint Life—Period Certain

  • Income guaranteed for the life of both annuitants
  • Choose a period such as 10 or 20 years
    • The annuity will pay the beneficiary if both annuitants die within that period

Frequently Asked Questions

The annuitant (insured) is similar to the insured in a life insurance policy. They are chosen by the owner to receive the income payments during the annuitization period. The annuitant’s life expectancy is used to determine the amount of the guaranteed payments. The annuitant must be an individual—a natural person—and cannot be a corporation or a trust.

The annuitant does not have the power to make withdrawals, deposits, change the names of the parties to the
agreement, or terminate the contract. They must also sign the annuity contract.
The contract owner and the annuitant are frequently the same person.

Annuitization is the process of converting an investment into a series of income payments that are guaranteed to last for the of the annuitiant or for a specified period of time. Annuities may be annuitized for a specific period or for the life of the annuitant. 

Related Articles

How Much Money Do I Need to Retire? Picture of white yacht on water with My Annuity Store, Inc. Logo on white sail.
Retirement

How Much Money Do I Need to Retire?

How Much Do I Need to Retire? If you are approaching retirement you’ve likely asked, “How much money do I need to retire?” If so, you are in good company.

Federal Mint Building : Fed Rate Hikes are good for annuities
Annuities 101

Annuity Rates Are Increasing In 2022

One of the most common questions we get is, “Will annuity rates rise in 2022”? Finally, the answer is “Yes, annuity rates are going to go up in 2022, and soon!”

Market Value Adjustment (MVA) Formula Infographic
Annuities 101

Market Value Adjustment (MVA)

What is a Market Value Adjustment (MVA)? Market Value Adjustment (MVA) is an adjustment applied to withdrawals from an annuity contract in excess of the free withdrawal amount during the

Owner-Driven Vs. Annuitant Driven Contracts: Magnifying glass on a legal contract
Annuities 101

Annuitant-Driven Vs. Owner-Driven Contracts Explained

Owner-Driven vs. Annuitant Driven Annuity Contracts An owner-driven contract terminates upon the death of the owner and the death benefit is paid directly to the designated beneficiary. An annuitant-driven contract terminates

Retirement Planning Calculator Picture of Moon because income planning isn't rocket science
Retirement

JourneyGuide Retirement Planning Calculator

Journey Guide: A Holistic Retirement Planning Calculator If our Retirement Planning Calculator was a car the JourneyGuide would be a Porsche 911 GT2. Most financial planners and retirement planning calculators

Ibexis MYGA Plus Annuity
Annuities 101

Compound Interest Calculator

How to Use a Compound Interest Calculator Compound (compounding) interest plays a very important role in financial planning. Our compound interest calculator is a very useful tool when planning your

Get a Free
Annuity Quote

My Annuity Store, Inc. BBB Business Review