What Is Certain and Continuous?
Certain and continuous refers to a type of annuity that guarantees a number of payments, even if the annuitant dies. If the annuitant passes away during the guaranteed period, a specified beneficiary will receive the rest of the payments. Alternatively, if the annuitant outlives the specified number of guaranteed payments, then he or she would continue to receive income payments for life; however, no payments would be available for the beneficiary.
- In a certain and continuous annuity, the annuity issuer must make payments for a guaranteed number of years, even if the annuitant dies.
- If the annuitant dies during the guaranteed period, the annuitant's beneficiary will receive the balance of the guaranteed payments.
- If the annuitant lives beyond the guaranteed period, they will continue to receive monthly payments for life.
- However, after the guaranteed period elapses, the beneficiary is no longer eligible for monthly payments once the annuitant dies.
Understanding Certain and Continuous
Certain and continuous annuities are a type of guaranteed annuity where the annuity issuer is required to make payments for at least a specified number of years. A common example is a 10-year certain and continuous annuity.
In such a situation, monthly payments are paid to the annuitant for life. If the annuitant dies, the designated beneficiary would receive any monthly payments for the remainder of the "certain" period—in this case, 10 years. Otherwise, if the annuitant lives beyond the 10-year period, they will continue to receive monthly payments for life; however, after the 10-year period, the beneficiary would no longer be eligible for monthly payments.
When you annuitize to create payments, the income stream is a combination of a return of principal and interest. With lifetime income annuities, income is primarily determined by life expectancy at the time payment is received, in combination with current interest rates.
In essence, annuitants place a bet with the annuity company that they will live longer than the company projects they will live. If the annuitant does live longer, the insurance company assumes the responsibility and must continue payments for the rest of the annuitant's life. In other words, annuities provide insurance for longevity risk. That's called transferring risk, and it's a unique benefit that only annuities can offer.
Two Types of Certain and Continuous Annuities
Certain and Continuous Only
An annuitant doesn't have to attach a life contingency when they annuitize. Instead, they can choose a specific period of time for the payments to occur. For example, a 20-year certain and continuous annuity will pay for 20 years, and then payments will stop. The shortest certain and continuous annuity is typically five years.
Life with Certain and Continuous
This type of annuity still provides a lifetime income stream, but the annuitant can choose the minimum amount of years that they or their beneficiaries will receive payments. For example, life with 10-year certain and continuous means that you will be paid for as long as you live. However, if you die in year three, your beneficiaries will receive seven more years of payments. If you live past 10 years, then there will be nothing left for your beneficiaries when you die.