Guaranteed lifetime withdrawals are one of the many benefits of an annuity contract, while annuitization is the process through which you create that benefit. You do not get your income unless you annuitize, but annuitization does not always produce lifetime income benefits. Additionally, you may have to wait several years before your income stream begins.
Life insurance contracts typically provide benefits to the beneficiaries of the insured. In contrast, annuities provide lifetime benefits to the contract holder. You can buy an annuity with a single premium or with a number of periodic purchase payments. When you buy a deferred annuity, your premiums are invested for a period of time before your income payments begin. In contrast, immediate annuities provide you with an income benefit that begins within a month of the contract purchase date.
The term "annuitization" refers to a monetary exchange between an insurer and an insuree, or "the insured." You pay a sum of money to an insurance firm, and in return, you receive an income stream. With an immediate annuity, the income stream is based on your purchase premium, plus a fixed rate of interest. On a deferred annuity, the income is based on the actual value of your contract at the time of annuitization. Some deferred annuities contain interest-paying sub-accounts, some contain mutual funds and others are indexed to the stock market. Depending on the contract, your deferred annuity may gain or lose value prior to annuitization.
When you annuitize, you have the option of creating a lifetime withdrawal benefit or an income term that lasts for a set number of years. During annuitization, the annuity provider divides your contract's value into roughly equal installments. You receive these installments over the life of the contract term or for life. Annuity companies generally work on the premise that people live no longer than 100 years. If you live past that age, the income payments continue, but the annuity company must use other funds to cover the cost.
Income payments on a standard income annuity come to an end when the annuitant dies. However, some contracts include a clause guaranteeing payments for a set number of years regardless of whether the annuitant dies prematurely. In such instances, remaining income payments go to your beneficiaries. You can also buy joint annuities, in which case, payments continue until the last surviving owner dies. Prior to annuitization, you can cash in an annuity, although you may pay surrender penalties for doing so. Annuitization is irrevocable, which means you cannot reverse the process once your income stream begins.