A years certain annuity is a retirement income product designed to provide the holder with a steady, periodic income—typically on a monthly basis—for a specified number of years. This unique type of annuity offers predictability by ensuring income for a predetermined period, no matter how long the annuitant lives.
This is different from a life annuity, which provides payouts for the rest of the annuitant’s life and potentially extends to a surviving spouse.
A years certain annuity may also be referred to as a “period certain annuity,” “annuity certain,” “fixed period annuity,” or “guaranteed term annuity.”
Key Takeaways
- A years certain annuity ensures periodic income over a specified duration, helping retirees plan their finances more accurately.
- It distinguishes itself by guaranteeing payment for a fixed period, irrespective of the annuitant’s lifespan.
- Should the annuitant pass away before the specified period concludes, the beneficiary continues to receive payments for the remaining term.
Understanding How a Years Certain Annuity Works
An annuity is typically provided by an insurance or financial services company and offers the recipient—a designated person known as the annuitant—a steady income stream over a set time frame. Retirees often turn to annuities for reliable income.
The Process
- Accumulation Phase: The individual funds the annuity. During this time, payments to the annuitant have yet to commence.
- Annuitization Phase: Payouts begin based on the terms of the purchased annuity. Various annuities determine the payout duration differently, with some set by years, while others are contingent on the annuitant’s life span.
A years certain annuity contractually obliges the issuer to provide higher monthly payouts compared to lifelong annuities or immediate annuities, since the period is finite. For example, if the annuity buyer opted for a years certain annuity with a 10-year duration but passed away in year eight, their beneficiary would continue receiving payments for the remaining two years. Once the 10-year term lapses, no further payments are made. The typical range for these annuities is from 5 to 30 years.
The Right Choice: Is a Years Certain Annuity Right for You?
Years certain annuities have a particular niche in retirement planning. They might be advantageous for an individual with supplementary income sources during retirement, such as another annuity or a retirement plan. Using a years certain annuity exclusively could be risky as the annuitant may outlive the payments, potentially leading to financial instability in later retirement years.
These annuities can also provide income for temporary periods, such as the gap between retirement and eligibility for full Social Security benefits. This can offer a comparatively higher income than life annuities, which bear the risk of continued payouts until death.
Choosing a years certain annuity requires careful consideration of one’s financial situation, alternate income sources, and the specific requirements for retirement income planning. Talk to a financial advisor to determine if this solution aligns with your financial goals.
Related Terms: life annuity, accumulation phase, annuitization phase, period certain annuity.
