Annuitization - Explained
What is Annuitization?
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Back To: INSURANCE & RISK MANAGEMENT
What is Annuitization?
Annuitization can be defined as the process of paying a fixed amount of money over time, in incremental payments to a beneficiary or an annuitant. Annuitization extends your annuity investment into a stream of regular payments to the annuity beneficiary or a surviving spouse in a joint life arrangement. This income is paid to the beneficiaries upon the death of the annuitant. This is a sum of money payable yearly or at other regular intervals as decided by the annuitant.
As far as annuitization is concerned, individuals offer a tangible capital to a life insurance company in exchange for periodic payments throughout their lifetime or within a time frame. Annuitization has been in practise for years but became a contract offered to the public in the 1800s by life insurance companies. And as become a worthy means of investment.
How Annuitization Works
Annuitization has a fixed calculation rate: the capital offered will determine the amount paid as regular income to the annuitant. The life insurance company pays an amount equivalent of the annuitant's age andlife expectancy rate with the projected interest rate the insurance company will credit to the annuity balance. All of these determine what is paid and the interest accrued by the beneficiary of the annuity at the end of the time frame of the annuity. This calculation works to provide a regular stream of income for the annuity and also benefit the insurance company. In this type of investment, the life insurance company takes responsibility for the annuitant living long as the payment continues until the death of the annuitant in the case of a lifetime payment period. It is important to note that the payment period is determined by the investors lifespan or an investor's choice of time frame. In both ways, the life insurance company is at risk of long term payments. If an annuity covers a single life, then the annuity becomes inconsequential upon the death of the annuitant and the annuity balance belongs to the insurer. But where annuity covers for joint lives, then the annuity covers till their death. Refunding is possible if the annuitant chooses the refund option which allows the beneficiary to receive the proceeds or balance of the annuity. An annuitant may decide to choose a lifetime refund option, but the length of the refund period will affect the regular monthly payment or yearly payment. If the period of the refund is within a wide range of time, then the lower the amount paid regularly. For example, if a refund option is 10years, death must occur within that 10years so that the beneficiary can be refunded and the payout will be reduced.
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