What Is a Years Certain Annuity?
Let me explain what a years certain annuity is—it's a retirement income product that gives you continuous periodic payments, usually monthly, for a specific number of years. Just like other annuities, it's designed to provide steady income in retirement. What sets it apart is that it guarantees this income for a set period, no matter how long you live.
This is different from a life annuity, which keeps paying for the rest of your life and sometimes your spouse's too.
You might hear it called a 'period certain annuity,' 'annuity certain,' 'fixed period annuity,' 'guaranteed term,' or 'guaranteed period annuity.'
Key Takeaways
- A years certain annuity is usually monthly retirement income paid for a specific number of years.
- A years certain annuity is unique because it is income that is paid for a particular length of time.
- If the annuitant dies before the period ends, it is paid to the beneficiary for the remaining period.
How a Years Certain Annuity Works
To review, an annuity is a financial product from an insurance or financial services company that pays you—the annuitant—a stream of payments over time. Retirees often use them for stable income.
There's an accumulation phase where you fund the annuity before payouts start. Then comes the annuitization phase, where payments begin, and the duration varies by annuity type. Some pay for a set number of years; others continue as long as you live.
With a years certain annuity, you typically get larger monthly payouts than with a life or immediate annuity because it's for a defined period, not until death. During the period you choose, payments go to you until it ends. If you die before then, your beneficiary gets the rest until the period expires.
For instance, if you pick a 10-year period but die in year eight, your beneficiary receives payments for the remaining two years. If you die after the 10 years, no more payments go to anyone.
These annuities aren't as common as life annuities due to their specialized nature. The periods can range from five to 30 years.
Years Certain Annuity: Is it Right for You?
In retirement planning, a years certain annuity has a narrow but useful role. It might appeal to you if you have other income sources, like another annuity or retirement plan. Relying on it alone is risky because if you outlive the payment period, you'll face reduced income for the rest of your retirement.
You could use it to bridge a short gap, such as between retiring and claiming full Social Security benefits. In that case, it provides higher income than a life annuity, which is riskier for the issuer since it pays until death.
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