When it comes to annuities, have you ever heard of “period certain” payouts or other confusing terms? Many people use annuities for guaranteed income streams. It’s helpful to know what these terms might mean if you are thinking about an annuity for your retirement.
One of the great things about annuity contracts is how they can be structured to fit different situations. Do you want guaranteed monthly income for the rest of your life? The insurance company will pay you like clockwork, even if all of the money in your contract runs out and it’s still paying you decades later.
Or what if you want the guaranteed income to last for only a certain period? Then you have some flexibility in how long you choose to receive those payments. With help from your financial professional, you can explore different annuity payout options and see what makes sense for your needs.
Of course, some people worry about not being able to enjoy these guaranteed annuity payouts for as long as they might wish. What if something major happened and they passed away sooner in retirement than expected? They wouldn’t have a full return of the money that they had paid into the contract.
The good news is someone can choose payout options that continue payments to their loved ones should they pass away in this manner.
What Is a Period Certain Payout?
Part of the menu of payout options is period certain payouts. Insurance companies introduced them in order to provide a minimum guaranteed payout to their contract holders.
Period certain payouts give flexibility in that they guarantee income for a certain number of years. Should someone pass on before this period has gone by, the payouts would continue to a stated beneficiary.
This guaranteed period usually starts at five years and goes for as long as 20 years.
You can use period certain payouts to specify guaranteed income for a specific timespan. Or you can choose payout options that give income for life while still having this guaranteed payment period for a fixed number of years. This latter option is called a life and period certain payout.
How Does a Period Certain Annuity Payout Work?
Here is an example of how this can work. Say a husband puts $250,000 in an annuity contract. The contract grows to twice this amount over a 15-year period, and then the husband dies.
He named his wife as the annuity’s primary beneficiary, and she starts receiving $1,500 per month of retirement income from the contract. But she herself then passes away in a car accident after receiving only four payments for a total of $6,000.
If she had opted for a “life-only” payout, then the life insurance company would keep the remaining balance of the annuity contract. A life-only payout will give you regular, guaranteed payments from the annuity for life. However, once you pass, the insurance company holds onto the remaining amount.
On the other hand, if she had chosen a life payout with a 20-year period certain, then the contingent beneficiary (in this case, their son) would receive 20 years’ worth of payments (minus the four payments that were made to the wife). This remaining amount could be either as a lump sum or over a 20-year period.
This guarantee ensures that someone will get a substantial payout from the contract, regardless of what happens to the original insured person, the person receiving the payments, or the primary beneficiary.
What Are the Trade-Offs of Period Certain Payouts?
Of course, this form of guarantee comes at a price in most cases. As more people are brought into the picture, it increases the obligation that the insurance company must fulfill. In many cases, that means a longer time period for the life insurer to cover as well.
As a result, the lifetime income of a beneficiary who opts for a period certain with their annuity will be lower than it would be for a life-only payout. This means that the monthly amount that is paid to the primary beneficiary will be lower than it would be if the period certain was not added on.
As period certain guarantees can last for five, ten, or twenty 20 years, it’s a long-time commitment for the insurance company and the longer the period, the lower the payout.
Say someone is a primary beneficiary, and they opt for a life and period certain payout with a 5-year period certain. They will get a higher monthly payment than someone who adds a 30-year period certain onto their payout.
Period certain payouts are commonly used to cover the contingent beneficiaries on a contract. The primary beneficiary is guaranteed to receive income for life.
However, the contingent beneficiaries are also guaranteed a certain amount if the primary beneficiary dies before receiving the period certain’s amount of payments.
On the other hand, say that our primary beneficiary opts for a 20-year period certain and then lives to collect 25 years’ worth of payments. In that case, the contingent beneficiaries would get nothing after their death because the period certain has expired.
What Situations Are Period Certain Payouts Often Used in?
In most cases, people will choose a period certain term that guarantees the full payment of at least the principal amount that was put into the annuity. Your financial professional can help you determine your options if you are thinking through this.
Period certain payouts are most commonly used among family members. If one spouse is the primary breadwinner and buys an annuity, then their spouse is usually the primary beneficiary and the kids are the contingent beneficiaries. But anyone can be named as a primary or contingent beneficiary.
Period Certain, a Powerful Solution for Survivorship Situations
In this way, we can think of a period certain as a minimum guaranteed death benefit. This can be a tremendous benefit for financial survivorship strategies.
The insurance company must pay out this amount if it hasn’t paid at least this amount out to the primary beneficiary before their death. A period certain can also be added to either a joint life payout or a joint and survivor payout.
In the case of a joint and survivor payout, the remaining period certain amount would be paid to the contingent beneficiary if both primary beneficiaries died before receiving the full amount of the period certain.
In the case of a joint life payout, it would be paid out upon the death of the first beneficiary.
Period Certain and Other Situations Besides Lifetime Income Needs
A period certain also makes it possible for the annuity to pay out for a certain period without any lifetime income. For example, let’s go back to the husband who bought the $250,000 annuity that grew to $500,000.
He could simply request that the annuity pay out $25,000 a year for 20 years. Payments would then stop after the 20th year, even if the husband or his wife was still living.
If he lives to collect 13 years of payments and his wife is the primary beneficiary, then she would collect the remaining seven years of payments (assuming that she lives for that long). If she died before collecting seven years of payments, the remainder would go to the contingent beneficiary.
What Are Some Disadvantages of a Period Certain Annuity Payout?
Of course, the main disadvantage of a straight period certain payout is the possibility that the beneficiary will outlive the payments.
Go back to the wife in our example. If she collected the seven years of payments and then went into a nursing home, she would have no more payments to help her cover long-term care expenses.
Situations like this can become difficult for both the beneficiary and their loved ones who might be tasked with caretaking.
Another disadvantage that comes with choosing a period certain option is that you are giving up control of the money. Once you begin receiving payments, you can’t withdraw any of the principal from your annuity or policy. The payment schedule is locked in and can’t be changed.
Finding the Right Options for You
Consult your financial advisor or life insurance agent for more information on period certain payouts and how they can benefit you. To make the most of this, you might consider discussing your personal situation in depth with your financial professional.
What does your family history look like? Your personal health? How about the family history of your spouse? How long do both of you expect to spend in retirement? Do you have any children with special needs or other situations where this extended coverage might be good?
Your financial professional can help you walk through the options and find out what makes sense for your needs. If you are looking for a financial professional to help you, many independent financial professionals are available at SafeMoney.com to assist you.
You are welcome to request an initial appointment to discuss your concerns, situation, and explore a working relationship. Use our “Find a Financial Professional” section to connect with someone directly and get started. Should you need a personal referral, call us at 877.476.9723.