What is an 'Annuity Certain'

Annuity certain refers to an annuity contract that provides a stream of payments for a predetermined number of years regardless of lifespan. An annuity certain will continue a stream of payments to the annuitant's beneficiary or estate if the annuitant dies before the payment term ends. The payments are made on a regular schedule, such as monthly, quarterly, semiannually or annually. Other names for annuity certain include "years certain annuity" "period certain annuity," "fixed period annuity," or a "guaranteed term" or "guaranteed period annuity."

Breaking Down 'Annuity Certain'

An annuity certain differs from a life annuity, which provides payouts for the remainder of the annuitant's life and, in certain cases, the life of the annuitant's spouse. If the life annuity's guaranteed period has not expired at the time of the annuitant's death, however, the annuity will continue to make payments to the annuitant's beneficiary or estate, until the guaranteed period ends.

An annuity certain typically involves larger monthly payouts than a life annuity or an immediate annuity since it pays out over a specific period of time rather than until the death of the annuitant. The buyer chooses how long they want their annuity certain to pay out. They will then receive payments until that period expires. Should the annuitant die before the period ends their beneficiary would receive the balance of the payments. For example, if the annuity buyer chose an annuity certain option with a 10-year period but they died in year eight, their beneficiary would receive payments for the remaining two years. If the annuitant were to die after the 10-year period ended, then no additional payment would be due to a beneficiary. Given the specialized nature of such an annuity agreement, they are used less frequently than life annuities. Common period lengths for an annuity certain range from five to 30 years.

Annuity Certain: Who Is It Right For?

Given their unique role in retirement income planning, an annuity certain contract has a narrow "sweet spot" of usefulness. As such, it may be more appealing to individual who will have another source of income during retirement (such as another annuity or other retirement plan). An annuity certain annuity would be risky if it were the only retirement income because the annuitant could outlive the monthly payment period and be forced to spend the remaining retirement years on a reduced income.

The annuity certain option also might be used to cover a short period of time, such as the gap between retirement and the age at which full Social Security benefits may be claimed. Such a use would generate a higher income payment than a life annuity, which is risker for the annuity writer because it continues paying benefits until death.

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