how annuitization works
upon receiving the lump sum of capital the life insurer makes calculations to determine the annuity payout amount the key factors used in the calculation are the annuitant s current age life expectancy and the projected interest rate the insurer will credit to the annuity balance the resulting payout rate establishes the amount of income that the insurer will pay whereby the insurer will have returned the entire annuity balance plus interest to the annuitant by the end of the payment period the payment period may be a specified period or the life expectancy of the investor if the insurer determines that the investor s life expectancy is 25 years then that becomes the payment period the significant difference between using a specified period versus a lifetime period is that if the annuitant lives beyond their life expectancy the life insurer must continue the payments until the annuitant s death this is the insurance aspect of an annuity in which the life insurer assumes the risk of extended longevity annuity payments based on a single lifeannuity payments based on a single life cease when the annuitant dies and the insurer retains the remaining annuity balance when payments are based on joint lives the payments continue until the death of the second annuitant when an insurer covers joint lives the amount of the annuity payment is reduced to cover the longevity risk of the additional life annuitants may designate a beneficiary to receive the annuity balance through a refund option annuitants can select refund options for varying periods of time during which if death occurs the beneficiary will receive the proceeds for instance if an annuitant selects a refund option for a period certain of 10 years death must occur within that 10 year period for the insurer to pay the refund to the beneficiary an annuitant may select a lifetime refund option but the length of the refund period will affect the payout rate the longer the refund period is the lower the payout rate changes to annuities in retirement accountsin 2019 the u s congress passed the secure act which made changes to retirement plans including those containing annuities 1 the good news is that the new ruling makes annuities more portable for example if you change jobs your 401 k annuity from your old job can be rolled over into the 401 k plan at your new job however the secure act removed some of the legal risks for retirement plans the ruling limits the ability for account holders to sue the retirement plan if it doesn t pay the annuity payments as in the case of bankruptcy note that a safe harbor provision of the secure act prevents retirement plans and not annuity providers from being sued 2the secure act also eliminated the stretch provision for those beneficiaries who inherit an ira in years past a beneficiary of an ira could stretch out the required minimum distributions from the ira over their lifetime which helped to stretch out the tax burden 1with the new ruling non spousal beneficiaries must distribute all of the funds from the inherited ira within 10 years of the death of the owner 1 however there are exceptions to the new law by no means is this article a comprehensive review of the secure act as a result it s important for investors to consult a financial professional to review the new changes to retirement accounts annuities and their designated beneficiaries 