An annuity can provide predictable, guaranteed income in retirement. You can also use an annuity contract to schedule payments from a structured settlement or a large financial windfall, such as a lottery payout. A period certain annuity lets you choose when an how long you’ll receive payments. Here’s how it works.
Annuity Payout Option Basics
When you purchase an annuity, you pay an insurance company a set amount of money. In return, the insurance company pays the money back to you in the form of annuitized payments. The type of annuity you choose determines when those payments start.Immediate Annuities
An immediate annuity can be purchased with a lump sum of money. Your payments can begin right away or within one year of purchasing the annuity. The payments you receive are guaranteed for the rest of your life. Your annuity may include a death benefit that allows you to name a beneficiary, such as your spouse, to receive payments after you pass away.Deferred Annuity
With a deferred annuity, your payments begin at a future date. For example, you might purchase the annuity at age 55. You can defer the payments until age 65 when you retire. The gap between purchase and payout is the accumulation phase. In this window, the money you invested in the annuity grows tax-free. You won’t pay taxes on the annuity payments until you take them.Period Certain Annuity Defined
A period certain annuity is a contract that lets you choose when and how long you’ll receive payments. The income you receive from the annuity is guaranteed for the time period that you specify. This income would be paid to you, but can pass to a named beneficiary when you die. Say you had an period certain annuity with a 1o-year lifespan. If you die five years into receiving payments, the beneficiary gets the last five years of payouts.
A period certain annuity alone can pair with a life annuity. A life annuity, which offers guaranteed income for life, you can get the certainty of having benefits paid over a certain number of years while also having the payments continue if you outlive that time frame.Period Certain Annuity Drawbacks
The period certain option with a life annuity can manage longevity risk, since you’ll always receive payments. Conversely, premiums for this kind of annuity may be more expensive. An insurance company has to guarantee payments over the period certain, even if you die.
Meanwhile, payments you or your beneficiary receive may be smaller than those of a life annuity. If you have retirement income and manage monthly expenses, smaller benefits are less worrisome.
However, a period certain annuity lets you set the payment schedule and predict how many payments you’ll receive. With a lifetime guaranteed income annuity, there’s some uncertainty since you can’t predict your own life expectancy.Are There Other Annuity Payout Options?
A period certain annuities is just one available annuity structure. Other payout options include:Joint and Survivor
With this type of payout, your spouse is guaranteed income from the annuity after your death. That’s helpful if you want to cover expenses after you’re gone. The downside is that the payment you’d both receive would be less than a single-life annuity that just covers you.Fixed Period
A fixed period annuity lets you receive payments for a fixed time period. So if you retire at 65 and set a 20-year fixed period, you’d receive annuity payments until age 85. This option is predictable, but risky. If you live longer than the fixed payout period, you’ll need other income sources.Lump Sum
You could choose to receive all of the money in your annuity once. You won’t have to wai months or years for a full payout. However, you’ll owe income tax on the lump sum in the year you receive it, which may increase your tax bill.Fixed Amount
Finally, you can receive a set payment amount each month. That’s something you might want if you know what you’ll be receiving from Social Security, tax-advantaged retirement accounts, and other investment or savings accounts. The payments would continue until you’ve exhausted all of the funds in the annuity. So in that respect, it could be more difficult to pinpoint an end date for when payments will stop.The Bottom Line
Whether a period certain annuity makes sense for you depends on what you need the money for and how long you need those payments to last. If you’d like to make sure that someone else is able to receive payments from the annuity if you pass away unexpectedly, a period certain annuity can help you accomplish that goal. You should also consider other options for leaving behind a death benefit, such as a permanent life insurance policy.Retirement Planning Tips
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