The 6 Payouts of Annuitization

Shawn Plummer

CEO, The Annuity Expert

Annuitization is a process that can be used to turn a lump sum of money into a series of payments. This can be helpful for people who are receiving payments over time, such as pensions or annuities. It can also be helpful for people who are selling a property and want to receive the money in one lump sum. In this guide, we will discuss how annuitization works and provide some examples of how it can be used.

What Is Annuitization?

Annuitization is typically done by financial institutions, such as banks or insurance companies. The process can be used for various types of payments, including annuities, pensions, and lump sum payments. In most cases, the money being annuitized is invested in some way, such as in bonds or stocks. The money is then used to make periodic payments to the annuity recipient.

Annuitization is converting your retirement savings into a guaranteed stream of annuity payments for a fixed period of time, the rest of your life, or both. This guide will cover the various payout options you can choose when annuitizing your annuity contract.

The amount of each payment will depend on several factors, including the size of the lump sum, the interest rate, and the length of time over which the payments will be made. The payments can be made monthly, quarterly, or annual.

The first thing to know is that every contract has the option to annuitize an annuity. 


One of the benefits of annuitization is that it can provide a guaranteed income stream for life. This can be helpful for retired people who do not have a steady source of income. Another benefit is that it can help protect against inflation, as the payments usually increase over time.


There are some drawbacks to annuitization, as well. One of the most significant disadvantages is that it can be challenging to access the money if you need it for an emergency. Additionally, once the payments have begun, they cannot be stopped or changed. Therefore, you must ensure that you are comfortable with the annuity terms before you agree to them.

Which Annuities Require Annuitization?

The single premium immediate annuity, two-tiered annuity, and structured settlement are the only three contract types that force you to annuitize your retirement savings. In structured settlements, the annuity settlement option is typically different from standard annuitized payments. For example, the payouts can increase or decrease in the future versus a level payout that does not change.

The 4th possible income annuity contract that requires annuitization is the Deferred Income Annuity. Still, in most products, one can cancel the contract before annuitizing, so there’s no forced income.

Which Annuity Does Not Require Annuitization?

The Alternative To Annuitization

Lifetime income riders or Guaranteed Lifetime Withdrawal Benefits are not a form of annuitization but provide a similar solution: receiving payments for the rest of your life. You can choose an income rider if you do not want to annuitize the annuity and still create a guaranteed income for life.

So let’s review your options below and check for annuities requiring you to annuitize your contract.

Annuitization Payout Options

There are seven annuitization payout options, but they can vary from product to product. Below are the seven types to help you make a better decision.

Fixed Period of Time (Period Certain Annuity)

What is the annuitization period? “Annuity Certain” or “Annuity Period Certain” is when payments are distributed to you for a fixed period of time. 

In most cases, you can choose a period ranging from 5 years to 30 years with a period certain annuity.

If you die before the end of the fixed period, the payments continue to pay your designated beneficiary until the period is up.

Because annuitization rates are low, you’re paying yourself back over time with a little bit of interest, which is currently around 1.25%.

You can find period certain annuities here.

Single Lifetime Income (Straight Life Annuity)

Individuals who purchase a single-life annuity are given protection against running out of money during their lifetime. Payments from a straight life annuity are distributed to you for the rest of your life until the day you die, guaranteed. 

Typically there is no death benefit to heirs. 

The life-only annuity payout usually distributes the highest income out of all annuitizations.

You can find single-life annuities here.

Joint and Survivor (The Couples Annuity)

Payments are made to you for the rest of your life until the day you die.  

When you die, the surviving spouse will continue to receive annuity payments for the rest of their life.

One can choose a payment reduction (50% to 100%) for the surviving spouse in exchange for a higher annuity payment upfront.

Once the surviving spouse dies, there is no death benefit typically.

You can find joint and survivor annuities here.

Lifetime Income with a Guaranteed Period (Life Annuity with Period Certain Annuity)

With a straight life annuity with a period certain, your annuity payments are paid to you until the day you pass away, with a guaranteed period that acts as a backup plan in case of premature death.

If one of the annuitants (you) dies before the guaranteed period of time expires, payments continue to pay your designated beneficiary until the period has expired.

Consider this a hybrid payout for Single Life Only Annuity and the Period Certain. This payout option can also be applied to a Joint and Survivor payout.

You can find life annuities with a period certain here.

Lifetime with Cash Refund (Refund Annuity)

The annuitant will receive payments for the rest of their life until the day they die.

If the annuitant (you) dies before receiving your original investment amount, the designated beneficiary pays the difference in a lump sum.

Sometimes called a “Cash Annuity.”

Lifetime with Installment Refund

The installment refund annuity payments will be distributed for the rest of the annuitant’s life.

If the annuitant dies before receiving the original investment amount back, the difference is paid to the designated beneficiary over installments until the original investment is paid back.

Also called an “Installment Refund Annuity” or “refund life settlement option.”


Most annuitizations allow you to elect an optional Cost of Living Adjustment (COLA) to your annuity payments.

The payments will start lower than most but increase yearly,mimicking inflation.

You get to choose how much of an increase you receive each year in most cases.

Tax Advantages

Nonqualified Annuities

Since nonqualified annuities are purchased with “after taxed” money, only the interest portion of your annuity payment is taxable.

Under current tax law, part of each annuity payment you receive is a return on your original principal, which means part of your annuity payment will be taxed, and the other part not.

Qualified Annuities

Generally, your payments are fully taxable because the funds have not been taxed yet.  

Since annuity payments will be distributed to you over time, you spread the tax liability over time (instead of a lump sum).

Deferring your annuity payments (Not Immediate annuities) over time may lead you into a lower tax bracket when you start collecting your annuity payments.

The Cons Of Annuitization Payments

The main disadvantage of annuitizing is a lack of liquidity. Once the contract owner invests their assets in an annuitized annuity, they are fully dedicated and cannot withdraw any money. In addition, annuitized distribution is irrevocable, which means once you “turn on” the income, you can not “turn off” the income.

The interest is low compared to other types of annuities.

Consider a deferred annuity with a lifetime income rider instead of annuitization. There are similar results, more flexibility, better death benefit, and helps pay for long-term care costs.

Annuitization At a glance

Fixed Index
Principal ProtectionNoYesYesYesYesNo
Access To PrincipalYesYesYesNoNoYes
Tax-Deferred GrowthYesYesYesNoNoYes
Guaranteed GrowthNoYesYesNoNoNo
Guaranteed IncomeYesYesYesYesYesYes
Inflation ProtectionYesYesNoYesYesYes
Death BenefitYesYesYesYes/NoYes/NoYes
Long-Term Care HelpYesYesYesNoNoYes

What Do My Beneficiaries Receive When I Die?

Annuitized payouts may or may not offer a death benefit to beneficiaries. If a death benefit is offered, a series of payments is the standard method of distributing the proceeds.

Helpful tip: Life insurance might be better if you want to leave money to your beneficiaries. In some cases, you don’t need to take a medical examination. Instead, use our quoting tool to research a life insurance comparison. Coverage starts at $9.37 per month.

Next Steps

If you are considering annuitization, we recommend you contact us. We will be able to help you understand the process and determine if it is suitable for your situation. Additionally, we can guide how to choose an annuity that will meet your needs. Thank you for reading this guide on annuitization. We hope that it has been helpful. Request a quote below.

Annuitization Of Annuity Payments

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Frequently asked questions

Why should I annuitize annuity payments?

You’re guaranteeing an income stream for the rest of your life or a fixed period of time. One should consider annuitization as adding an extra layer of retirement income complementing Social Security Income.

If an annuitant dies before annuitization occurs, what will the beneficiary receive?

Typically the annuity’s account value will be distributed to the designated beneficiary in a lump sum. However, with that said, a few annuity contracts will distribute the annuity’s value over a fixed period of time.

Can I change my mind after annuitizing?

No. The decision to annuitize the annuity is final. You can not switch your annuity payment option either. In most cases, you will not be able to withdraw additional funds from your annuity either. Always have additional funds that are liquid in case of an emergency.

What is the annuitization period?

The annuitization period is the period of time an annuity distributes a series of payments to the contract owner. The annuitization period begins once the annuity owner has received the first payment.

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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