Annuities

What does it mean?

Put simply, to annuitize is to start taking payments from an insurance annuity that may have been accumulating for some time.  Specifically, you “trade” the accumulated annuity balance for a stream of payments over a specific term of years or life (a life annuity).

An annuity, a policy that is paid into either by lump some or regular payments by the policyholder, and gains value via investment of those funds by the insurance company that holds the policy, in a manner agreed between the two parties, has many terms attached when it is created, and there may be an option to annuitize at a certain point or date set at the start of the insurance annuity agreement.

What happens when I annuitize?

When, and how, the policy becomes annuitized is determined by the rules and terms that are agreed by the policyholder with the insurance company, and these can be varied and dependent on many different factors.

If the policy has a number of different options at which annuitization can take place, then it is up to the policyholder to decide what is best for him or her.  In many cases, if the insurance company does not hear from you, annuitization starts automatically at age 85.

When the choice is made, and one has opted to annuitize, there are a number of ways in which payments can be structured. There are options that involve continued payments within the lifetime of the policyholder, or those that pay up to a certain date (e.g. 10 years) beyond which the policyholder may live, but with no further payments. There are also options that allow a lump some payment of an agreed amount that can only be taken after a certain amount of time has elapsed on the policy, at which point the annuity is said to have matured.

Some annuities allow for the payments to be made to a partner or designated recipient (joint life annuitization), too, and there are other considerations that should be taken into account.

Should you Annuitize?

This is a question that only the policyholder can answer, but if the time has come to draw money from the annuity, some factors should be considered.

If the policyholder is collecting for himself, the lifetime payment option makes a great deal of sense, giving a guaranteed income for the rest of one’s life. The decision to annuitize, whichever option is taken, is not reversible – once done it cannot be rescinded, and the policy is deemed to have matured. (there are a few companies that now allow “commutation” which is the ability to cash in the annuity once it’s been annuitized.  You, the annuitant or owner will pay a stiff price to commute an annuity).

The most obvious reason for annuitizing is to claim the guaranteed payments that come with the policy, and this should be a consideration when deciding whether to annuitize. It may be that the policyholder needs the money in order to live, but in a large number of cases the money is used to set up a further annuity, continuing the process and effectively putting into action a chain reaction of annuities and annuitizing that creates greater income.

An annuity can be a worthwhile for those who like the option to annuitize and thereby shift the responsibility for income to the insurance company.

Learn more.  Get your copy to avoid “Annuity Owner Mistakes“

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Retirees often want to know how quickly they can get to their money in case they need to cover extraordinary expenses such as a medical emergency, or a home or auto repair. This need for liquidity may cause them to avoid and insurance annuity. However, when you look closely, you will see that insurance annuities can possibly provide access to funds that can accommodate many circumstances.

For instance, what if you need to take out money before the insurance annuity matures?  Most annuity companies will let you remove a portion of your account’s value each year without paying a withdrawal charge. This is usually 10%, and once the surrender charge period expires, you will be able to withdraw as much as you want without paying any penalties to the issuer. But an insurance  also can allow for other circumstances.

Suppose you are worried about money for future long-term care or a medical emergency. Some annuity companies will give you penalty-free access to your funds if you have to go to a nursing home or come down with a critical illness.
And what about income?

If your situation changes and you need income from your insurance annuity, you will have the opportunity to annuitize the contract and receive payments for a fixed period or life. This option is available after one year of buying the insurance annuity. Once you annuitize the contract, the annuity is not considered includable for Medicaid qualification purposes in some States (the income could be, however).

What happens when you die? Will your survivor get the money he or she might need?

The annuity company will transfer the account’s value to your designated beneficiary without any surrender charges, penalties, or probate fees in almost all cases (you can check this in the contract first).

Do you think that there is a chance that creditors might come after your money? Many states’ laws protect insurance annuities from creditors.

So before you decide that insurance annuities do not offer the ease of access that you might need to your funds, look at the complete picture. Examine what you might need this money for—what situations would you consider potential emergencies? It is possible that an annuity company has just the right option for you.

Get your free copy of the booklet on insurance annuity.

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