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A period certain annuity is a contract that guarantees payments for a specific number of years, as opposed to the annuitant’s lifetime. In the event that you die before you recoup your full premium, the payments can be passed to a beneficiary.
Lifetime annuities are structured to pay out for the duration of an annuitant’s lifetime. Insurance companies offset the risk they assume by pooling their clients’ premiums and issuing mortality credits to annuity holders who live longer than expected. This is suitable for annuity owners who don’t include beneficiaries in their contracts.
But, this structure doesn’t work for everyone. If you want the guaranteed income a lifetime annuity provides but also want to leave the balance of your annuity’s value to a beneficiary in the event that you pass away unexpectedly, then a period certain annuity may be the right product for you.
What Is a Period Certain Annuity?
Period certain annuities function much like lifetime annuities, but instead of paying out for the rest of the annuitant’s life, they pay guaranteed income for a specified period of time — typically 10 to 20 years — regardless of whether the annuitant lives that long. Upon the death of the annuitant, a period certain annuity will continue providing income payments to a beneficiary named in the contract.
A period certain option added to a straight-life or joint and survivor annuity means the insurance company must continue making payments after the death of the annuitant. For this reason, income payments will typically be lower than the periodic payments from a lifetime annuity.
Life Annuity with Period Certain
A life annuity with period certain is a hybrid option that provides lifetime payments with guaranteed income for a specified number of years.
For example, if you purchase a single-life annuity with a 20-year period certain and pass away 10 years later, your beneficiary will collect income benefits for another 10 years.
Without the period certain option, income benefits will be terminated upon your death, and the insurance company will apply the remaining value of your contract as mortality credits, which they will use to pay the surviving annuitants.
- Single life/life only
- Joint and survivor
- Lump-sum payment
- Systematic withdrawal
- Early withdrawal
Each of these payout options offers its own unique benefits. Speak with a financial advisor if you are unsure of which option meets your needs.
Benefits of a Period Certain Payout
The inability to accurately estimate their return deters many people from buying annuities. This uncertainty is due to the fact that none of us knows how long we will live.
But with a period certain annuity, you know how long your payments will last. You set your payment schedule. You’ll know exactly how many payments you and your beneficiary will receive and the amount of the payments.
In addition, in instances where the period certain is less than the life expectancy of the measuring life, the payments will be larger than payments from a straight-life annuity.
Drawbacks of a Period Certain Payout
Period certain annuitization guarantees income for a specific time period, regardless of whether the annuitant lives that long. This is advantageous if you die prematurely, but if you live beyond the period certain, you won’t have the security of regular income payments for the rest of your life.
Michael Kitces of Buckingham Wealth Partners emphasized the value of mortality credits for annuity owners who live past their life expectancy and explained that “trying to protect against an annuity loss in the event of early death, and protect heirs, actually eliminates much of the benefit that annuities are meant to provide in the first place.”
This protection is the ultimate goal of a period certain annuity or a life annuity with period certain. Annuity holders who choose this payout option are choosing to forfeit the additional payments they would receive if they lived longer than other annuitants in the insurer’s pool.
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- Kitces, M. (2015, April 1). Understanding The Role Of Mortality Credits – Why Immediate Annuities Beat Bond Ladders For Retirement Income. Retrieved from https://www.kitces.com/blog/understanding-the-role-of-mortality-credits-why-immediate-annuities-beat-bond-ladders-for-retirement-income/