What is Annuitization?

Annuitization meaning can be defined as the method of dividing the annuity Income of an individual into periodic payments. You can annuitize this payment for the entire life or for a specific number of years. If there is only one annuitant added to the contract, then the payment will be transferred to only one person.

If you have signed up for the joint-life arrangement, then the annuitant, as well as the surviving spouse, will be eligible for the annuity income. Annuitants of the investment are allowed to have a beneficiary or multiple beneficiaries that will receive the remaining income if the annuitant dies.

How does Annuitization Work?

It may sound like a new concept, but Annuitization is a centuries-old contract that came into effect in the beginning of the 18th century when Life Insurance provides created the formal contracts for annualization. The person can sign a life insurance policy and pay a lump sum to the insurer in return for the periodic payments of the annuity that they will be entitled to receive for the lifetime or for the given period. Now, once the lump sum is paid to the insurance company, the annuitant can expect periodic payments for the given period.

Once they have received the lump sum, the insurer will calculate the total amount they are supposed to pay to the investor. This will be calculated based on the life expectancy of the investor. The main factors used for the calculation of the annuity payment are the current age of the investor, their life expectancy, and most importantly, the interest rate they have to add to the balance.

Factors Used for Annuitization

Using these factors, the investor will determine the periodic payment they will pay to you. The insurer has to make payments until they have paid in full.

The insurer has to find out the life expectancy of the person before establishing the appropriate pay period. For example, if the insurer has a life expectancy of 25 years, then that is how long the payment duration will last. Now, as mentioned earlier, there is a big difference between a lifetime period and a specified period. If the person getting an annuity has signed up for a lifetime period, then they will enjoy the contract as long as they are alive. It does not end even if the specified duration expires.

It is important to note that the annuity payments that are for only one person will expire as soon as the annuitant of the contract dies. The remaining amount will not be transferred to the surviving spouse or any other family member. The insurer that transferred the money until the death of the annuitant will be entitled to keep the rest of the money. Now, if you have signed the joint annuitant contract where you have included two or more people in the contract, then the payments will be continued even after the death of the annuitant. In such a case, the payment will be transferred to the surviving spouse.