Annuities have different stages in their growth. The first stage is called the accumulation phase. This is where your annuity is accumulating funds. Through either a single lump sum contribution or by flexible premiums, your annuity is funded by your contributions. Interest also begins to grow during this phase. In other words, the accumulation phase is all about increasing your savings. Between the money you put in it and the interest that those funds incur, this is the phase where you grow your wealth.
The next phase is the annuitization , or payout, phase. Here, the money starts coming back to you. There are a lot of variables and customizations that you can attribute to your annuity, but during this phase, your money and its growth is returned to you. These funds are taxed on last in, first out basis, so you will have to pay more taxes on your first distributions than you will later on in the life of the annuity.
You can choose to have money come back to you instantly in an immediate (sometimes called “income”) annuities. Or you can have a deferred annuity where your funds grow for at least a year before you start receiving distributions. There are also advanced life deferment annuities. These products are generally straight life products and do not start giving out distributions until the annuitant is at least 80 years old. This is a great way to make sure that you never run out of money.
Once the annuitization phase begins, your annuity is locked in place. You cannot add more money to it, nor can you change your distribution options. In rare instances, this can cause a problem for people, especially if an emergency arises and they need a large sum of cash immediately. While you have the annuity still within the accumulation phase, you can withdraw money, with a penalty added in most instances. But once you annuitize your contract, you are locked into the repayment plan that you selected.
There are a couple solutions to this. While in most cases, you will want to leave your annuity untouched—they are designed to fund your retirement—you have an out if you do need money. If you have not yet annuitized your contract and you’ve had your annuity for over ten years, in the vast majority of cases, the insurance company will not penalize you for withdrawing all of your money. You will still get the interest you accrued in this instance, but there will be no annuitization of your contract. The downfall here is that your money becomes more limited; you will no longer gain interest on your savings, nor will you have the budgeting benefits that annuitized contracts come with.
Going to an institution that buys annuities is a last resort if you need a lot of cash fast and you have already annuitized your contract. These companies will pay you a lesser amount than what your annuity is actually worth and will receive the benefits from the insurance company instead of you for the rest of the contract’s life. Such measures should only be used if absolutely necessary as you will lose quite a bit of money. But if you need instant access to your money and your savings are locked into an active contract, this can provide you with cash quickly.