Insurance Continuing Education – Annuitization of Annuities

Annuitization refers to the equitable distribution of principal and interest over a set period. Annuitization has a distinct advantage because the tax-favored disbursements offer a tax-favored benefit. The tax-favorable status is not applicable to situations in which funds are scarce.

Nearly all annuity contracts allow for annuitization. The contract owner decides how the funds will be received when the annuity is annuitized. What will be the payment method (monthly or semi-annually? annually, quarterly?, etc. Annuitization may also be possible for fixed-rate and variable contracts.

Annuitization has its disadvantages. Annuitization is not possible to change once it has been done. Annuitizing a Variable Annuity can be disadvantageous. The amount of the check in these cases will depend on the results of sub-accounts and the money that was allocated to them. Variable Annuities have investment risks. These are the risks of the person who receives the checks. This is often the contract owner/annuitant. They are not the responsibility of the insurer.

As we will see, the more aggressively the money is invested, then the less predictable the payout stream. The flip side is that annuity funds should be invested in short-term bonds or utilities to ensure predictable income from time-to-time.

Annuitizing a fixed-rate annuity has the potential disadvantage of requiring a check. This is due to the competitiveness and current rates of the insurer. The duration of withdrawals. And, of course, the principal amount being annuitized.


The concept of mortality tables is well-known to those working in life insurance. A mortality table is a record of how many people die and who survives at each age, based on a large number. A mortality table, in other words, is a chart showing the death rate for each age as a function of the number of deaths per 1,000. It depicts a hypothetical group that begins at a particular age, and then tracks the history year by year until they all die.

For several reasons, the mortality tables that are based on life insurance experience cannot be used to develop rates for annuities.

1. Annuities are generally not recommended for people in poor health. Annuitants with immediate annuities of single premium are more likely to die than those covered by life insurance policies. A life insurance table would therefore overstate the expected mortality rates.
3. Despite the fact that the mortality rates are steadily rising, even if they are sometimes offset by unanticipated developments, such as AIDs, it creates a steadily increasing margin of safety in life insurance companies. However, this has the opposite effect on annuities.

An annuity table should show the expected future mortality rates, not the rates experienced in the past. These are technically called “Tables with Projection.” These tables are different from “static” tables that were used in life insurance. They did not allow for rate changes based on the year they were applied.

Life insurance has had the advantage of improving mortality. However, annuity policies have seen a decrease in their margins. The “postponement of death” has meant that annuity payments are more frequent. Annuity tables used today often include projection factors that allow for future changes in mortality rates. Variable annuities are particularly affected by the need to perform such calculations because they represent a growing portion of annuity business and have no interest margin to offset any future mortality losses.