by Orlando McCall
You give an insurance company a specified amount when you buy an annuity. In exchange, the insurance company pays that money back to you in payments. Modern annuities give you numerous choices and a good deal of customization options. One popular annuity option is the period certain life annuity.
A period-certain annuity is a contract that lets you decide when and for how long you will receive payments. The guaranteed payouts you get from your annuity continue for a contractually agreed-upon time. If you pass away before your contract ends, the remainder of the payments can go to a named beneficiary, such as your spouse.
For example, say you purchased a lifetime annuity with 15 year period certain, and you passed away ten years into the contract, the insurance company would issue payments for an additional five years to your spouse or another beneficiary. The period- certain option with a life annuity can help manage what’s known as “longevity risk.” Because they have set income terms, period certain annuities are sometimes helpful when funding an early retirement. They may also be beneficial for pre-funding loans or life insurance policies.
However, premiums for period certain annuities are typically higher than for other options. That is because the annuity company is obligated to guarantee payments over the agreed time, even if you die. Meanwhile, payouts to you or your beneficiary are often less than those of a lifetime guaranteed annuity. This may not be problematic as long as you have other sources of retirement income and manageable monthly expenses.
Period certain has quite a few pluses, though. For one thing, it provides you with more income predictability. You decide the payment schedule and can accurately predict how many payments you’ll receive. When you choose a lifetime guaranteed income annuity, there’s always a measure of uncertainty since it is impossible to know your own life expectancy. Depending on your unique circumstances and what you want and need from your money, you and your retirement and income advisor may decide that period certain is a good fit for your portfolio.
What about the other annuity payout options?
Period-certain annuities are just one of the many available annuity structures. You could also
select other payout options, including:
Joint and Survivor
A joint and survivor option may be helpful if you want to cover final expenses when you’re gone. If you choose a joint and survivor payout, your spouse gets guaranteed income from your annuity after you pass away. However, the payouts you and your spouse would receive in a joint and
survivor annuity would be less than for an annuity that only covers you.
Fixed Period Annuity
A fixed-period annuity is precisely what its name implies- a contract that gives you payments for a fixed time. For example, if you retired at 70 and decided on a 20-year fixed period, you would get payments until you turned 90. This option, although predictable, is a little riskier. If you live beyond the fixed payout period, you may run out of money. Most people who select this option usually have other income sources available just in case.
Lump Sum
It’s possible to receive all of the money in your annuity in one payment. A lump sum option might be a good choice if you can’t or don’t want to wait for the total payout. Unfortunately, the IRS will send you an income tax bill for that money for the year you receive your lump sum.
You could get a predetermined amount each month.
You could elect to receive your annuity as a monthly payment amount. This may be a great choice if you already know what you’ll be getting from Social Security and your other retirement or investment accounts. With a predetermined selection, payouts continue until you have used up all the money in your annuity. This option could add some unpredictability to your retirement planning since it is difficult to determine when your payments will end.
The bottom line:
Annuities are some of the most valuable tools available if you want protection for your principal investment, guaranteed lifetime income, or want to leave a legacy. A period-certain annuity makes sense for some seniors. Whether this is the correct choice depends on multiple factors,including what you need your money to do and how long you want to receive that income. For instance, if you want to ensure that your spouse or other loved one gets payments from your
annuity if you die unexpectedly, a period-certain annuity may be what you need. Many annuity products offer special riders to help you manage long-term care expenses. However, before settling for any annuity payout options, you should talk to a competent retirement income
advisor who thoroughly understands annuities. However powerful and flexible annuities may be, they are not a perfect choice for all seniors.
Because they are a little more complicated than other safe money products, you should always seek guidance from a qualified financial advisor specializing in taking the money you’ve saved and turning it into income.
