Definition
The annuitization rate is the factor a carrier applies to a deferred annuity contract's account value at the time of annuitization, expressed as an annual income amount per dollar of account value, that determines the lifetime income the contract will pay under the selected payout option.
Why it matters
The annuitization rate is the operational expression of what an accumulated annuity contract will produce as income at the moment the contract owner converts account value to a lifetime income stream. Carriers typically publish two annuitization rates for the same contract: a current rate based on prevailing pricing assumptions and a guaranteed rate set at contract issue that establishes a floor on the income the contract will produce at annuitization. The current rate is almost always higher than the guaranteed rate in normal conditions, but the guaranteed rate becomes the relevant figure when prevailing rates have fallen substantially since issue.
How it works
At annuitization, the carrier multiplies the contract's account value by the applicable annuitization rate (current or guaranteed, depending on which applies under contract terms) to produce the annual income for the selected payout option. The annuitization rate reflects the annuitant's age and gender at annuitization, the prevailing interest rate environment, the carrier's mortality assumptions, the payout option selected, and the carrier's margin for expenses and profit. Different payout options (life-only, life with period certain, joint and survivor, refund) apply different annuitization rates to the same account value. The annuitization rate for a fixed deferred annuity is closely related to the payout rate on a single premium immediate annuity at the same age and gender, since both convert capital to lifetime income through the same mechanism.
In practice
An individual approaching annuitization of a deferred annuity should request the current and guaranteed annuitization rates from the carrier for each payout option being considered, on the actual account value at the projected annuitization date. The current rate should be compared against the open-market single premium immediate annuity rate available from other carriers for the same age, gender, and payout option, because the contract owner is typically permitted to 1035-exchange the account value into an immediate annuity from a different carrier if the open-market rate is materially higher. The guaranteed rate should be reviewed in the context of how it would compare to a worst-case rate environment at annuitization, since the guaranteed rate is the contractual floor. An advisor should be asked to confirm whether the contract's current annuitization rate is competitive with the open market before annuitization is executed.
In the Longevity Standard Framework
The annuitization rate is the operational expression of what an annuitized contract produces per dollar of account value, and it maps directly onto the cost-of-income unit that is the canonical analytical unit of the Longevity Standard framework. A higher annuitization rate corresponds to a lower cost of income for the same income stream, holding all other parameters constant. The framework evaluates the annuitization rate against the frictionless pool as the benchmark and solo drawdown as the baseline; at a 12% representative insurer load, a single premium immediate annuity delivers realized value of approximately 23% for a focal individual (67F, $500K, 3% real, plan to 90), indicating that the open-market annuitization rate available at that load captures approximately 23% of the theoretical pooling benefit.
Related terms
- Annuitization
- Annuity payment options
- Cost of income
- Frictionless pool
- Payout rate
- Realized value
- Single premium immediate annuity
- Solo drawdown