What Happens Once a Variable Annuity Is Annuitized?
Once you have annuitized a variable annuity, you will receive monthly checks from the insurance company that sold you the contract. The amount and duration of the annuity payments depend on the decisions you made before signing the papers to annuitize. After the annuity payments have started, you cannot change the terms of the annuity, so it is best to understand the consequences before the first check goes out.
For a variable annuity, annuitization represents the point at which an insurance company begins to make payments to you from your variable annuity after your annuity contract converts all the accumulation units to annuity units for your payout.
Annuity Income Options
The insurance company will offer a choice of options for how long you will receive annuity payments. The basic life annuity means you get a payment every month until you die. It does not matter if you live one year or 30 years; you'll get payments until you are gone, and at that point so are the payments.
Alternative income choices include a joint-and-survivor annuity, with payments lasting until the second of two people has died. Or you can annuitize the contract for a fixed period, such as payments for 20 years. The insurance company may offer variations on these three types of payout. Each option will have a different monthly payment.
Fixed Annuity Payments
When you annuitize, you can move away from the market-based value changes that defined the accumulation phase of the annuity and lock in a fixed monthly annuity payment. The amount of the payment will be based on your current annuity value, current interest rates and the income option you pick.
Once you go with the fixed annuity payments, the payment will not change. The fixed-payment option removes the chance of losing income to falling rates or a declining stock market. On the other hand, the fixed payment will never increase.
Variable Annuity Payments
Instead of a fixed annuity payment, you can choose to receive a variable payment that changes based on the investment returns earned by the annuity subaccounts. These are the same investments your annuity held during the accumulation phase. With a variable annuity payment, the initial payment is based on a base return rate. Then each year the payment is adjusted up or down depending on whether the investments produced a return higher or lower than the base rate.
For example, one insurance company uses a base rate of 4 percent. If the investment accounts do better than 4 percent for the year, the annuity payments for the next year are higher.
Annuitization Considerations and Options
If the stock and bond markets repeat historical results, the variable payment choice could provide a growing payment to help your income keep up with inflation. However, a down year in the market could result in a smaller payment, and that might be money you were counting on to support your retirement. A compromise approach is to annuitize a portion of the account value as a fixed annuity payment, and take the rest as a variable payment.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.