Annuitization

This term refers to the equal distribution of the principal amount coupled with the interest. It may also refer to the increase or growth of annuity spread out over a time frame. There exists a definite advantage when it comes to annuitization. On top of favorable tax disbursements, there are other benefits to be enjoyed. However, it should be understood that when the nature of funds tends to be sporadic, the favorable tax conditions shall not be applied.

In majority of annuity contracts, annuitization is permitted. In the practice of an annuity becoming annuitized, the policy holder becomes involved in the decision-making process in establishing how that particular individual would like to receive funds. For example, the policy holder will, then, get to decide how the payment schedule will be. Payments can be given on a monthly or yearly basis. Other options like quarterly and semi-annual payments are also possible. Annuitization can also be applied to variable contracts and others which have fixed rates.

One major drawback that discourages people from applying for annuitization is that, once it has been established revisions are no longer permitted. There are very few exceptions where changes are allowed but, generally, it would not be possible in most situations. Also, for variable annuities which are annuitized, the amount to be received by the contract owner will not be consistent. It will all depend on the outcomes of sub-accounts which were selected for investment. The amount of money placed in these accounts will also have a bearing on the check that will be received. For people with annuitized variable policies, these “movements” in terms of increasing and decreasing values, are all part of investment risks. These are taken on by the annuitant or contract owner and not by the insurance company.

An easy observation to make is that when money is invested “aggressively”, the results become more unpredictable especially when it comes to the payout. However, when annuity funds are placed in sub-accounts in money markets, utilities, and short-term bonds; the flow of income to be derived from these investments becomes more predictable.

For professionals working in the life insurance industry, most of them are familiar with the concept of mortality tables. This is a chart or table that represents the rate of death in a specific age group against the number of deaths per thousand. It would indicate a group of hypothetical persons that start off at a certain age with their corresponding histories. This tool is used to determine rates and profitability when it comes to insurance plans.

Based on these morality tables, the outcomes show that development of rates for annuities in life insurance plans, are not appropriate due to several reasons. Often, annuities are bought by individuals who don’t have the best health. For single premium annuities, annuitants had lower mortality rates as oppose to policy owners who owned life insurance plans. Annuities work opposite the manner of insurance policies. More money could be earned by the contract owner when death is postponed.