What Is Period Certain?
Period certain is an annuity option that allows the customer to choose when and how long to receive payments, which beneficiaries can later receive. This is unlike the more conventional life, lifetime or pure life annuity option, in which the annuitant receives an income payment for the rest of their life, regardless of how long their retirement lasts.
A period certain annuity is also described as an "income for a guaranteed period." The insurance companies that create and market annuity products can employ a variety of names and descriptions.
- A period certain annuity pays out cash flows during the annuitization phase for a set number of years.
- This can be contrasted with a guaranteed lifetime annuity that pays out until the annuitant dies, which is an uncertain period of time.
- Because of the certainty with a period certainty option, these generally pay out higher monthly or annual cash flows than a life annuity.
Understanding Period Certain
By selecting the period-certain annuitization option, the annuitant is usually able to receive a higher monthly payment than with a life option. This extra income comes with a price, though; the risk that the annuity payments will run out before the annuitant's death (longevity risk). For example, say a 65-year-old annuitant decided to start receiving payments from their annuity and chose a 15-year period-certain payout option. This would provide them with a retirement income until the age of 80.
Should the annuitant die at or before age 80, this option would not present a problem, but should they live longer than 80 years and not have another source of retirement income, this option could prove risky.
Period Certain vs. Pure Life Annuity
A pure life or lifetime annuity pays a benefit to the annuitant until death. The deceased's estate or beneficiary will receive no benefits after that point. With such an annuity, there is no risk of outliving the retirement income they provide.
By choosing a period certain option in a life, guaranteed or certain annuity the annuitant can specify when the benefit will start and how long it will last to tailor it to their retirement and estate planning needs, as well as their lifespan expectations. With a period certain option the deceased annuitant's estate or beneficiary may still receive annuity payments until the timeframe specified within the period certain expires. Common periods for a period certain annuity are 10, 15, or 20 years.
Period Certain Plus Life Annuity
A hybrid product combines a period certain annuity with a life annuity and is called "income for life with a guaranteed period certain benefit" (also referred to as "life with period certain"). This strategy provides a guaranteed payout for life that has a period certain phase. If the customer (annuitant) dies during the certain period phase, their beneficiary receives the remainder of payments for that period.