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Annuitization: How Does It Work?

Stan Haithcock
March 1, 2021
Annuitization: How Does It Work?

If you grew up in rural America, you remember the outside water spigot we used with the garden hose and to fill buckets. Imagine if you mistakenly ripped or broke the knob off of that faucet. If that happened, water would flow uninterrupted until you got someone to fix it.

That’s the visual definition of creating a lifetime annuity income stream using “annuitization.”

To “annuitize” a policy for lifetime payments means that the income stream is going to hit your bank account every month until you die. You can also structure the annuitized policy so the annuity payments can continue to you spouse or listed beneficiaries of the policy. Structuring annuitized payments is customizable to contractual achieve exactly what you want to happen.


Annuitization first started in the Roman times when the empire gave lifetime income guarantees to the dutiful Roman soldiers and their families. The Latin word for payment is “annua,” which is the origin of today's word “annuity.” That first Roman annuity type was the first version of today’s Single Premium Immediate Annuity (SPIA).

SPIAs have been sold in this country for hundreds of years, and are still the best contractual choice for income needs starting immediately or up to 1 year of deferral. The annuity payout is a combination of return of principal plus interest, with life expectancy playing the primary pricing role. Interest rates are a secondary pricing factor. Regardless of type, an annuity contract is issued by life insurance companies.

By the way, “annuities” are the only financial product that guarantees a lifetime income stream. It’s a monopoly that only annuities have. For the majority of Americans that don’t have company pension benefits, annuities can create your own “personal pension” to team up with the best inflation annuity that every U.S. citizen already owns. That would be your Social Security payments.

Money Goes Poof?

Too many people, financial advisors, and financial pundits think that if you create an annuitized stream of payments and you die...the money goes poof and is kept by the annuity company. That describes only 1 of over 30 or more different ways to contractually structure an annuitized policy. “Life Only” is the annuitized structure that people are referring to when they think that the income goes poof when the annuitant dies.

“Life with Installment Refund” and “Life with Cash Refund” both guarantee a lifetime annuitized income stream, but any unused money goes to the listed beneficiaries on the policy. In other words, the annuity company doesn’t keep a penny even though they are on the hook to pay regardless of how long you live. You can always structure an annuitized policy “Joint Life” to cover two lives. It’s your call. It’s customizable.

You can also pair a lifetime income guarantee with a period certain backstop. For example, “Life with 20 Year Period Certain” means that the annuity company will pay you for life. But if you died in year 7, there would be 13 more years of payments to the policy beneficiaries. If you died in year 12, there would be 8 more years of payments. If you died in year 21, there would be no payment left for the beneficiaries. Got it?

Another annuitization choice is just structuring the monthly payment option for a Period Certain. This means you will receive payments for the specified period of time that you choose at the time of application. For example, a “20 Year Period Certain” annuitization structure does not include a life option. You will receive 20 years of payments. After that time period, there are no more payments. If you die in year 14, then there would be 6 more payments to the listed policy beneficiaries.

Annuitized Plane Tickets

Shopping for annuitized products is like shopping for a plane ticket. You punch in your specific information to find the best deal. In order to do that, you need to find an objective annuitization calculator to shop all carriers for the highest contractual guarantee for your specific situation. For annuitization quotes, you can use a lump sum amount or reverse engineer the quote to solve for a specific monthly income payment. Either way, it’s contractually guaranteed and a pure transfer of risk.

Whether you are shopping for Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), or Qualified Longevity Annuity Contracts (QLACs) can customize these annuitized policy structures to meet your specific goals.

The irrevocable nature of annuitized income shouldn’t scare anyone. Your Social Security payments can be classified as “annuitized.” The same can be said for your pension payments (if so fortunate).

It might be time to consider ripping the knob off of that lifetime income faucet. Adding to your guaranteed income floor is always a good idea.

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