Annuities can serve many purposes and help you accomplish a broad range of goals. However, throughout history, annuities have primarily been used to generate guaranteed income. This is usually accomplished through a process called annuitization.
While the term “annuitization” may suggest a complex process, it’s really just a method of converting a lump sum of money into a stream of income. Annuities offer you the opportunity to annuitize your funds immediately, in the future, or never at all.
What are the benefits of annuitization? And how does it work? Below is everything you need to determine whether annuitized income is right for you:
How does annuitization work?
Annuitization happens when the annuity provider converts your lump sum contribution into a guaranteed stream of income. The income amount is based on a few factors described below. The payment is guaranteed for a defined period of time, usually for life. However, it can also me guaranteed for certain periods, like 10 or 20 years.
The insurance company calculates your payout amount based on a few factors:
- The expected duration of the payout. The longer the payout period, the lower your payout amount is likely to be. For example, everything else being equal, a 10-year period would have a higher payout than a 20-year period. Similarly, someone with a shorter life expectancy would receive a greater lifetime payout amount than a younger individual.
- The annuitized amount. Clearly, the more money you convert into income, the higher the income amount will be.
- Interest rates. Insurance companies have to invest their assets and earn a return in order to fund your guaranteed payout. They often invest in fairly conservative, interest-bearing vehicles. Thus, interest rate projections often factor into the payout calculation.
What are the benefits of annuitization?
The primary benefit of an annuitized payout is certainty. When you annuitize your policy, you receive a predictable, guaranteed stream of income for a certain period of time. If you choose to receive your income for life, you can rest easy knowing that you always have some minimum level of income available no matter how long you live.
This kind of reliable income can be helpful in retirement. It can help you protect yourself against unpredictable forces like market volatility, inflation, and even the need for long-term care or costly medical treatment.
Ready to learn how you can benefit from guaranteed lifetime income in retirement? Let’s talk about it. Contact us today at America’s Annuity. We can help you analyze your needs and develop a strategy.