What Is Annuitization?

Hi. Stan, The Annuity Man, America's annuity agent. Welcome to The Annuity Man's website. You clicked on "What is Annuitization?" What the heck is that? It's hard to spell and pronounce, but annuitization is a way of getting income from an annuity, whether for lifetime income or a specific period of time. We're going to go through all of that now.

How It Works

Let's talk about annuitization more from a standpoint of how it works. If you're from the South or grew up in a rural area where you had a house with outdoor faucet spigots, we call them spigots in the South where I grew up in North Carolina. Annuitization comes down to this. If you rip the knob off a spigot, the water's just going to flow. You can't do anything about it until you call the plumber. So, annuitization is ripping the knob off, and the income stream is going to flow. It's going to hit your bank account until you die, with a lifetime income stream, or for a period certain, it's going to flow for that period. So, we're going to talk about that.

Annuity Types

Three primary types of annuities use annuitization for their income streams: Single Premium Immediate Annuities, Deferred Income Annuities, and Qualified Longevity Annuity Contracts. Now, you can get quotes on all of those at The Annuity Man. We have the best annuity calculators on the planet that will shop all carriers for your specific situation. With annuitization and all lifetime income streams, we need to know your specifics to run the quotes and get the best quotes from all carriers. We need dates of birth or date of birth if it's just you, dates of birth if it's joint, and your state of residence. We need when the income stream starts; we need what type of account, and then we need the amount of money you're going to put into the annuity or how much money you want to create on a monthly, quarterly, semi-annual, or annual basis. Most people have a monthly income stream, so we can reverse engineer the quote.

So, in essence, you can say, "Okay, how much does $200,000 pay me and my wife for life?" Or you can say, "My wife and I need $2,500 a month for the rest of our lives. How much money will it take to create that contraction guarantee?" We can run those quotes for you. But annuitization is just a combination of return of principal plus interest. In fact, all annuity income, regardless of the type, is a combination of return of principal plus interest.

And you have to say, wait a minute. Are you telling me they will give me my money back with interest? Is that a good deal? It is if you live forever. I mean, you're transferring the risk to the annuity company to pay you for the rest of your life. And only annuities can provide that. Only annuities can provide that guaranteed income stream that solves for longevity risk, which is the fear about outliving your money. So, what's the return on investment on a lifetime income stream? I know that once you die. Up until that point, it's a pure transfer of risk. You either find benefit in that, or you don't. But if you love your Social Security, you'll love a lifetime income stream annuity because they're the same thing. If you love your pension, you'll love a lifetime income stream annuity because it's the same thing.

Ways to Do It

One more thing. You can do annuitization in two ways. You can do life or joint life, or you can do a period certain. Now, let's talk about the period certain for a second. A period certain is obviously not for your life. It's for a specific period of time. And you got to say, well, why would I do that? Let's say you need a gap of income. Let's say you need 10 years of income until something else kicks in, whether it's a pension, Social Security, or something like that. I had a call the other day, and a guy said, "Hey, I need 11 years of income. After those 11 years, I've got a pension kicking in. My Social Security is going to kick in. But the wife and I need income for those 11 years."

Period Certain

So, a period certain can be any year; it could be three years, five years, seven years, or 11 years. And again, it's a combination of return of principal plus interest. The primary pricing mechanism is not your life expectancy; it's interest rates. Interest rates drive the pricing train. When we send you the quotes, you will see two columns. You're going to see the see income, what the income is, and then you're going to see what's called the exclusion ratio, which is the part that you do not pay taxes on in a non-qualified account, non-IRA account. And that's the return of principal. You'll pay taxes on the interest. So, that's period certain. That's one way to do it.

Single Life or Joint Life

Life is the other way to do it. You could do single life or joint life, that's your choice. Single life is going to pay higher because why? They're backing up the income stream for one life instead of two. But you can set it up joint life so that when you die, when your LearJet hits the mountain, your spouse or partner will receive the income stream uninterrupted and unchanged for the rest of their life.

Now, with this, most people say, "Hey, I don't want to do that because the evil annuity company keeps the money when we die." Well, that's only if you want that to happen. That's called life only. But you don't have to do that. You can say, "I want single or joint life with an installment refund or with a cash refund." An installment refund means that when the second spouse dies in a joint life scenario, whatever's left in the account is paid in payment form until the money's exhausted. A cash refund is when the second spouse dies, and then whatever money's left in the account goes in a lump sum to the beneficiary.

That's how annuitization works. It's a combination of return of principal plus interest. You do not have to do a life only. In fact, you could also do it with installment or for a cash refund; you could do a life with, take a period certain, with a 15-year certain. Let's explain that.

So, it's on your life. It will pay for the rest of your life regardless of how long you live. You can live forever; they're on the hook to pay. That's the annuity benefit proposition that only annuities can offer. Lifetime income.

But let's say you died in year five. If you died in year five with a life with 15-year period certain, then there's 10 more years of payments for your list of beneficiaries. If you died in year 12, then there are three more years of payments for your list of beneficiaries. If you died in year 16, the beneficiaries have no payments. However, you can customize how you want the annuitization structure to work. In fact, you can get as detailed as you want, but there are between 30 and 40 different ways to structure an annuitization payment.

Customizable

Remember, annuitization is ripping the knob off a faucet, okay? The income faucet, the income's coming for life. But it's customizable, so you can set it up to where it will work exactly how you want it to work. And the conversations that you and my team will have, we will ask you questions so that we can drill down to exactly how you want the contract to work. Keyword contract. Then, we will shop all carriers to find the highest contractual guarantee.

With that, I encourage you to go to my site The Annuity Man, and you can use the calculators we have there yourself, or you can have us work with you to develop a customized plan. We look forward to that conversation. You can download all my annuity books for free. I've written six owner's manuals on all things annuity. Download them for free and under no obligation. I need you educated. I need you to understand what you're buying. I need you informed. And I need you to make a decision on your terms and on your timeframe.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.