Converting lump sum into guaranteed lifetime income
Quick Definition: Annuitization is the irreversible process of converting your annuity's account value into a stream of guaranteed income payments. Once annuitized, you cannot access your principal as a lump sum—you receive only the scheduled payments for life or a specified period.
Annuitization transforms your annuity from an accumulation product into a pure income product. Here's what changes:
Before annuitization:
After annuitization:
Account value: $350,000 in a FIA
Owner age: 70
Decision: Annuitize for lifetime income
Payout options presented:
Option 1: Life only
$2,450/month for life ($29,400/year)
→ Highest payment
→ Stops at death, nothing to heirs
Option 2: Life with 20-year period certain
$2,240/month for life ($26,880/year)
→ Payments guaranteed minimum 20 years
→ If death before year 20, beneficiaries get remaining payments
Option 3: Joint life (spouse age 68)
$2,050/month for both lives ($24,600/year)
→ Continues at 100% after first death
→ Stops when second person dies
Jane chooses Option 2: Lifetime income with 20-year guarantee. She receives $2,240/month for life, and if she dies in year 10, her beneficiaries get remaining 10 years of payments.
Highest monthly payment, but stops at death with nothing to heirs. Good for single individuals with no bequest goals and desire for maximum income.
Guarantees payments for minimum period (10, 15, 20 years) even if you die early. Beneficiaries receive remaining payments. Reduces monthly amount slightly but provides death benefit protection.
Payments continue over two lives (usually spouses). Can choose 100% survivor (full payment continues) or 50-75% survivor (reduced payment after first death). Lower initial payment due to two-life expectancy.
Fixed payments for specific period (10-30 years) regardless of survival. Not true lifetime income—payments stop after period ends even if you're alive.
These are two different ways to generate income from an annuity:
| Feature | Annuitization | Income Rider |
|---|---|---|
| Reversibility | Permanent, cannot undo | Can stop/restart withdrawals |
| Account value | Eliminated—no lump sum access | Maintained—can access if needed |
| Death benefit | None (unless period certain/joint) | Beneficiaries get remaining value |
| Monthly payment | Higher (~7-9% of premium) | Lower (~4-6% of income base) |
| Annual cost | None—built into payout rate | 0.75-1.5% rider fee |
When to choose annuitization: Want maximum income, don't need lump sum access, no death benefit concerns
When to choose income rider: Want flexibility, death benefit protection, potential account value growth
Annuitization makes sense if:
Avoid annuitization if:
⚠️ Critical Warning: Annuitization cannot be reversed. Once you convert to income payments, there is no going back to lump sum access. If you're uncertain, consider income riders or systematic withdrawals instead—these preserve flexibility.
1. Income riders: Get guaranteed income while keeping account value and death benefit
2. Systematic withdrawals: Take regular withdrawals (within free withdrawal limits) without formal annuitization
3. 1035 exchange to SPIA: Move money to immediate annuity when you're actually ready for income (avoid locking in too early)
4. Partial annuitization: Annuitize portion of account for guaranteed income, keep rest liquid
Annuitized payments have favorable tax treatment compared to withdrawals:
Annuitization converts your annuity into permanent income payments with no access to lump sum. It provides the highest guaranteed income but sacrifices flexibility. This decision is irreversible, so be certain before annuitizing. For many people, income riders or systematic withdrawals provide better flexibility while still delivering guaranteed income.