What Is an Annuitized Annuity?

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As you get older, limited resources might lead to the fear of outliving your assets. You buy an annuity to guarantee yourself or your spouse a lifetime of income, which provides peace of mind. Although you're buying an income stream, you aren't required to dip into that immediately. Once you start receiving regular payments, however, the annuity is annuitized.

Immediate or Deferred

Annuities are sold by insurance companies. An immediate annuity uses a lump-sum premium payment to provide a lifetime of income. A deferred annuity takes either a lump sum or a series of payments over time, growing the assets in a tax-deferred account. You can elect to take occasional payments or to annuitize at some point in the future. If you don't start taking payments, the annuity contract has a "start date" designated in the original terms. The start date is the required annuitization date based on your life expectancy if you haven't yet started using the annuity.

Payout Options

There are various payout options for an annuitized annuity. Once you elect an option, you're not allowed to change your mind or adjust the option later. Lifetime income is a common option, guaranteeing you income regardless of how long you live, but it isn't the only option. Lifetime income options can be based on your sole life expectancy or a joint and survivor life expectancy, meaning if your spouse is the joint annuitant, he's guaranteed income even after you die. There are also fixed-period options that designated a guaranteed number of payments, such as for 20 years. In that case, after 20 years, the payments stop regardless of whether you still need income or not.

Choice Ramifications

Various annuitization options have different ramifications for your overall financial plan, including benefits to heirs. With a lifetime income option, if you die, your beneficiaries get no payments unless there's a contract rider guaranteeing a minimum number of payments. Assuming it doesn't and you pass away within two years of starting the annuity when you expected 25 years of income, your estate loses the rest. Period-certain options leave assets in the estate, providing the cash balance to heirs upon the death of the annuitant.

Considerations

It's not uncommon to look at annuitization when trying to reduce assets for disability or Medicaid qualifications. Eligibility for these programs requires using estate assets, leaving just $2,000 in total assets before benefits are granted. Annuitizing an annuity takes the cash value away from you, meaning you no longer have the asset: You only have an income stream, thus helping you qualify for benefits in certain cases. This is a slippery slope and should only be done with the aid and advice of an elder law specialist — spending down assets in this fashion might lead to denial of benefits.

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