What does the term 'annuitization' refer to?

Annuitization refers to the process of converting the accumulation phase of an annuity into the payout phase. This is a critical aspect of how annuities function, as it marks the transition where the policyholder starts receiving regular income payments instead of contributing money to the annuity.

During the accumulation phase, the investor deposits money into the annuity, which grows either at a fixed interest rate or linked to the performance of underlying investments. When the annuitization occurs, that accumulated value is transformed into a structured series of payments, typically over a specified period or the lifetime of the annuitant.

Understanding this concept is vital because annuitization influences how long and how much income an annuitant will receive, thereby affecting financial planning for retirement or other long-term financial needs. The focus of annuitization is primarily on ensuring that individuals have a reliable income stream in their later years, making it a cornerstone of retirement planning.