Annuity Payout Options: What is Period Certain? - SmartAsset

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 financial windfall, such as a lottery payout. A period certain annuity lets you choose when and how long you’ll receive payments. Here’s how it works.

Consider working with a financial advisor as you create or update a retirement plan.

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 a lifetime annuity with a 10-year period certain. The insurance company promises to pay out for the rest of your life but no less than 10 years. In other words, if you died five years after buying the contract, the insurance company would continue to make payments for another five years to your named beneficiary.

Period Certain Annuity Drawbacks

The period certain option with a life annuity can manage longevity risk, since you’ll receive payments as long as you live. However, premiums for this product 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 – with certainty – 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 annuity 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 wait 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

Consider talking to a financial advisor about whether annuties would be a good fit in your financial plan. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Annuities can be helpful in mapping out your retirement income sources, but it’s important to research them carefully before purchasing one. The most important things to focus on include the type of investment returns you can expect, the fees you’ll pay to purchase the annuity and the quality of the company that’s selling the annuity contract. A financially unstable company may not make your expected annuity payments. SmartAsset’s annuity reviews can help you separate quality annuity providers from their lesser competitors.