Annuities: a big word that can mean a lot of different things based on how it is used. Annuities come in multiple forms, such as variable, fixed, immediate, and deferred. They can be funded as an IRA or with cash sums from a bank account. They can also be exchanged without tax consequences from one annuity to another, or from life insurance cash value to annuity (but not from annuity to life insurance). With all of these different options, it isn’t hard to see why annuities can be confusing.

One of the most confusing aspects is the concept of annuitization. Annuitization occurs when a lump sum of money in an annuity contract is turned into a stream of income for a certain time period. Often, the time period is for the rest of the annuitant’s life; however, there are multiple annuitization options, and they can vary by insurance company. Common forms include the following:

• Life only – A payout that ends at the death of the annuitant, whether it is one year or twenty years. This option usually has the highest monthly payout amount of life-based options.
• Life with period certain – A payout for life that has a minimum guaranteed number of years should the owner die earlier than expected. For example, John starts an annuity payout and dies one year later. His period certain is ten years. Thus, his beneficiaries continue to receive John’s payments for the following nine years
• Joint and survivor – This option allows payouts to continue over the lives of two people, commonly spouses. There are often sub-options, such as 100% payout, in which the payment stays the same for either lives, or 50% (and other varying amounts) in which the payment continues at a reduced amount after the first annuitant’s death.
• Period-certain – This option isn’t dependent upon one’s life, but continues for a pre-determined period such as 10, 20, or 30 years.

Many annuities don’t need to be annuitized to create an income stream, but instead can generate regular or periodic withdrawals. This is often the case with variable annuities that have many different versions of withdrawal benefits and riders.   By choosing this route an annuitant may be trading a higher lifetime income stream for the flexibility to withdraw larger amounts or even the entire account value.

Are annuities a good investment? The answer is usually “it depends.” The concept of annuitization requires analysis and depends on each person’s situation and what they ultimately want to achieve.

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