What Is a Term Certain Annuity?
A term certain annuity is an insurance product that guarantees a periodic payment of a predetermined amount for a fixed term. Once the term has elapsed, these products are spent and there will be no future payments, even if the annuitant is still alive.
Should the annuity buyer die before the term ends, any leftover assets can be given to a named beneficiary. Other names for a term certain annuity include "years certain annuity," "annuity certain," "period certain annuity," "fixed period annuity," or a "guaranteed term" or "guaranteed period annuity."
What Is An Annuity?
Understanding the Term Certain Annuity
Term certain annuities make periodic payments to the annuitant over time, but once the period expires no additional payments are due. As such, term certain annuities are most often used as a way to provide bridge income between certain periods, such as a gap between when an individual retires and when they begin claiming retirement benefits.
A term certain annuity 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, which limits the insurer's risk.
Should the annuitant die before their chosen payment period ends, their beneficiary would receive the balance of the payments. For example, if the annuity buyer chose a term certain annuity with a 10-year period, but died in year eight, the beneficiary would receive payments for the remaining two years.
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.
Annuitants may choose to purchase these products gradually by making periodic payments, or may make a purchase with a single lump-sum premium payment. Usually, lump-sum purchases are made at, or shortly after, the annuitant's retirement.
Term Certain Annuity Risks
The main risk involved in purchasing a product such as a term certain annuity is the potential of outliving its payments and being left with no money to live on. For this reason, term certain annuities should only be purchased under the guidance of a reputable financial professional, and likely as part of a more sophisticated retirement income plan that factors in additional sources of income.
Because of the tax-deferred status of such insurance products, many wealthy investors or above-average earners choose to purchase term certain annuities for the tax advantages they offer.