What Happens When You Annuitize an Annuity

Annuitizing means converting your annuity balance into regular payments for life

Annuitizing is the moment you tell your insurance company to start sending you money on a schedule — usually monthly or quarterly — instead of keeping the balance sitting there. Once you annuitize, you cannot get the remaining balance back as a lump sum. The insurance company takes on the risk that you live longer than expected, and you get the security of checks arriving on the same date every month, for as long as you live.

Most annuities are designed to be annuitized eventually. You buy the contract, let it grow (or not), and then at some point — often when you retire — you flip the switch. That switch is annuitization. What happens next depends on the type of annuity you own and the payout option you choose.

Key Takeaways

• Annuitizing converts your annuity balance into a stream of regular payments, and you lose access to the remaining balance once you start.
• The payment amount is calculated based on your age, life expectancy, current interest rates, and the payout option you select.
• You can choose to receive payments for your lifetime only, or for your lifetime plus a survivor benefit to a spouse or beneficiary.
• Once annuitized, you cannot change your mind or access a lump sum, so the decision should match your retirement income needs.
• Some annuities let you delay annuitization indefinitely, while others require it at a certain age or after a set number of years.

How the payment amount gets calculated

The insurance company uses a formula that takes your age, the balance in your annuity, current interest rates, and your life expectancy into account. A 65-year-old will receive a higher monthly payment than a 55-year-old with the same balance, because the company expects to pay out over fewer years. A woman will typically receive a lower payment than a man of the same age, because women have longer average life expectancy — the company spreads the same balance over more years.

Interest rates matter too. When rates are high, your monthly payment is higher because the insurance company can earn more on the money it holds. When rates are low, payments are lower. This is why some people delay annuitizing if they think rates might rise, though there is no way to know for certain.

You do not negotiate the payment amount. The insurance company calculates it using its own mortality tables and assumptions. Different companies may offer different amounts for the same annuity, so if you are considering annuitizing, it can be worth getting quotes from multiple insurers — some allow you to shop your annuity to a different company before you annuitize.

The main payout options you can choose

Life only (also called "straight life") pays you a monthly amount for as long as you live. When you die, payments stop and your beneficiary receives nothing. This option produces the highest monthly payment because the insurance company is only obligated to pay you, not anyone else.

Life with period certain guarantees payments for your lifetime, but also promises that if you die within a set period (often 10 or 20 years), your beneficiary will receive the remaining payments. This lowers your monthly payment slightly compared to life only, because the company has taken on an additional obligation.

Joint and survivor continues payments to your spouse or named beneficiary after you die, usually at the same amount or a reduced amount (like 50 or 75 percent). This produces the lowest monthly payment because the company may be paying for two lifetimes. Some versions reduce the payment to the survivor; others keep it the same.

Life with refund guarantees that if you die before receiving payments equal to your original balance, your beneficiary gets the difference as a lump sum. This is less common and produces a lower payment than life only.

When you must annuitize versus when you can wait

Some annuities require annuitization at a specific age — often 85 or 90 — or after a certain number of years have passed since you bought the contract. This is called a required beginning date. If your annuity has one, you cannot straightforward hold the money indefinitely; the contract will force you to start taking payments.

Other annuities, particularly some deferred annuities, let you choose whether and when to annuitize. You could hold the balance for decades if you want, or annuitize at 70, or never annuitize at all — instead, you might withdraw money as needed. Read your contract or ask your insurance company whether annuitization is required and, if so, when.

If you are still working and do not need the income, delaying annuitization may make sense. If you are retired and need steady income, annuitizing sooner typically locks in a higher payment because you are older. There is no single right answer; it depends on your health, other income sources, and how much certainty you want.

What you lose when you annuitize

The biggest trade-off is liquidity. Once you annuitize, you cannot ask for your balance back as a lump sum. If you need a large amount of money for an emergency — a medical bill, a home repair, or anything else — you cannot access it from an annuitized annuity. You only get the monthly payment, no matter what happens.

You also lose control over the money. If you die shortly after annuitizing, your heirs may receive far less than your original balance, depending on which payout option you chose. If you chose life only, they receive nothing. This is why some people choose a period certain or survivor option, even though it reduces the monthly payment.

Inflation is another consideration. If you annuitize with a fixed payment, that payment does not increase over time. In 20 years, the same monthly check will buy less than it does today. Some annuities offer inflation-adjusted payments, but these start lower and grow over time — you have to choose this option before you annuitize.

The difference between annuitizing and taking withdrawals

You do not have to annuitize to get money from your annuity. Many annuities let you take withdrawals whenever you want, in whatever amount you want (subject to any surrender charges or penalties). This keeps your money flexible and gives you access to the balance if you need it.

The downside of withdrawals is that you bear the risk of running out of money. If you withdraw too much early, or if the annuity does not earn as much as you expected, the balance could be depleted before you die. With annuitization, the insurance company bears that risk — you get the same payment no matter how long you live.

Some people use a hybrid approach: they annuitize part of their annuity for may provide income and leave the rest in the account to withdraw as needed or to leave to heirs. This is possible with some contracts but not all, so check your annuity documents.

Tax treatment when you annuitize

When you start receiving annuity payments, part of each payment is considered a return of your original investment (the amount you paid in) and part is considered earnings. The earnings portion is taxable as ordinary income in the year you receive it. The return-of-investment portion is not taxed.

Your insurance company will calculate the exclusion ratio, which tells you what percentage of each payment is tax-free. This ratio is based on your life expectancy at the time you annuitize. If you live longer than expected, you will eventually receive payments that are entirely taxable (because you have recovered your full investment). If you die before recovering your investment, your beneficiary may be able to deduct the unrecovered amount on their tax return.

If your annuity is inside a retirement account like an IRA or 401(k), the tax rules are different — most or all of your payment will be taxable because you did not pay taxes on the money going in. Consult a tax professional about your specific situation.

Frequently Asked Questions

Can I change my mind after I annuitize?

No. Once you annuitize, the decision is permanent. You cannot switch back to a lump sum or a different payout option. This is why it is important to think carefully about which option fits your situation before you annuitize. Some companies offer a short window (like 30 days) to reconsider, but after that, you are locked in.

What happens to my annuity if I die shortly after annuitizing?

It depends on your payout option. If you chose life only, your beneficiary receives nothing — the insurance company keeps the remaining balance. If you chose life with period certain or joint and survivor, your beneficiary receives the remaining may provide payments or a survivor benefit. This is why many people choose an option that protects their heirs, even though it lowers the monthly payment.

Does annuitizing affect my Social Security or Medicare?

Annuity payments are counted as income for Social Security taxation purposes if your total income exceeds certain thresholds, which may cause some of your Social Security to become taxable. For Medicare, annuity payments count toward your income for premium calculations. The exact impact depends on your total income and filing status — ask your tax advisor or contact Social Security directly.

Can I annuitize only part of my annuity?

Some annuities allow partial annuitization, where you convert part of your balance into payments and leave the rest to withdraw or grow. Not all contracts offer this, so check your annuity documents or contact your insurance company. This approach can give you both may provide income and flexibility.

What if interest rates rise after I annuitize?

Your payment does not change. Once you annuitize, your monthly amount is locked in for life. If rates rise, new annuitizations will offer higher payments, but yours stays the same. This is why some people delay annuitizing if they think rates might increase, though predicting rate movements is difficult.