How Do I Convert a Lump Sum to an Annuity?

An annuity is a tax-sheltered retirement investment. Because an annuity is a tax shelter, just like an IRA, you pay penalties on the gains if you withdraw the money before you're age 59 1/2. Unlike an IRA, however, there are no limits on how large of a lump sum you deposit. There are no income limits either. However, since there are penalties to withdraw money, it's best not to put money you might need before retirement into the account. Opening an annuity and investing a lump sum is easy once you know the right kind of annuity to purchase for your needs.

Step 1

Decide between a variable, indexed or fixed annuity. A variable annuity has sub-accounts that resemble mutual funds. You choose from the sub-accounts in the annuity and how much to invest in each. A fixed annuity is similar to a CD that you allow to renew automatically. You initially know the interest rate but have no idea what the next rate will be once the guaranteed term ends. Indexed annuities follow a specific index, such as the S&P 500. If the index increases in value over a certain percent, the company credits your account with a portion of that percentage. If you choose 50 percent as that portion and the index increases by 12 percent, you'd receive a 6 percent gain. However, if the index loses money, you don't lose money but receive a fixed minimum interest rate named in the contract.

Step 2

Select a variable annuity if you have a lot of other investments and they're mostly in fixed investments. Investments that give only interest don't keep up with inflation. Since variable products contain stocks, they do keep pace with inflation. This is very important the younger you are. If you started out with $10,000 in a fixed investment and it doubled, but the price of everything else tripled, you lose buying power, and even though you have more money, it buys fewer items. The more time you have to retirement, the more likely you'll see inflation make prices of goods and services skyrocket. While bank products and interest-bearing investments might be safe, the interest on the money often isn't as high as the increase in prices. If you have other money invested in CDs and savings, you need the diversification of a variable annuity for your money to grow as fast as inflation does.

Step 3

Choose an annuity provider and an investment representative from which to purchase the annuity. You can buy annuities directly through an insurance company if you want, but you don't save a fee or benefit from doing that. Insurance companies build their fees into the annuity and you pay them, no matter where you purchase the product. If you use an insurance agent or investment representative at a brokerage house or bank to buy your annuity, you receive free investment advice and the benefit of the representative's financial knowledge. When you have a variable annuity, the representative can help you decide the best division of your funds into the various sub-accounts.

Step 4

Fill out the paperwork. You'll need to give the annuity provider information such as your date of birth, full legal name and address. Make certain to use your full legal name for the annuity and, in fact, for any financial product you own. In later years, if you decide to merge accounts, the names have to match exactly.

Step 5

Write a check and put your money into the annuity. Make sure you receive a copy of the annuity contract once the company issues it. It takes about a week to two weeks for them to create the actual policy and send it to you or your representative, even though your money goes to work the minute the company receives it. You won't need it to cash in the policy, but it's good to have on hand for your records.

About the Author

Jay P. Whickson worked as an insurance rep, financial planner and stockbroker from 1979 until her retirement in 2007 when she began writing about the field of finance. Whickson has both a Bachelor of Science and a Master of Science in education from Indiana University. She also has post Masters courses in science and a number of different insurance and investment designations and degrees.