An annuity certain — also referred to as a period certain annuity — is a financial product that provides fixed guaranteed payments for a preset period. Even if you pass away before receiving all the withdrawals, the remaining distributions go to your beneficiary until the end of the contract.
This article will explain how an annuity certain works so you can decide whether one fits into your savings plan.
How does an annuity certain work?
To understand how an annuity certain works, it’s helpful to first learn the mechanics of a basic annuity. Below is a brief example.
Annuity example
- Initial investment: You open the annuity with a lump-sum payment of $10,000.
- Accumulation phase: This is the period where your investment builds and grows tax deferred. For a fixed annuity, annually, the the insurance company adds 5% to the account value. Below is a hypothetical example of how your initial investment could grow over ten years and is for illustrative purposes only.
- Initial investment: $10,000
- Cash value after year 1: $10,500 ($10,000 + $500)
- Cash value after year 2: $11,025 ($10,500 + $525)
- Cash value after year 10: $16,289
- Maturity: On the 10th anniversary of your purchase, the accumulation phase ends, and the payout phase begins.
- Payout phase: After maturity, you may receive monthly payments or make a lump-sum withdrawal. The annuity contract determines whether you receive distributions for a specific period (annuity certain) or life (life annuity).
Annuity certain vs. life annuity
Here’s how an annuity certain and a life annuity differ.
What’s an annuity certain?
An annuity certain makes payments for a specific amount of time, regardless of how long you live. Five, 10, and 20 years are common annuity certain periods. If you die before the distribution phase ends, the remaining account value goes to your beneficiary.
It’s important to note that some annuities offer indexation, which adjusts your payments to account for rising prices and inflation. In these cases, the insurance company ties your distributions to a specific economic indicator, such as the consumer price index. If the indicator increases, so do your payout amounts.
What’s a life annuity?
A life annuity makes guaranteed payments until you die. Unless a specific clause or rider names a beneficiary, the payments end upon your death.
The benefits of an annuity certain
Annuities certain offer numerous strategic benefits for investment and estate planning.
Predictable, guaranteed income
An annuity certain allows you to accurately predict your payments and the duration of the payout phase. This stability means you can allocate annuity distributions to specific expenses, like housing or food, without worrying about running out of funds.
Estate planning benefits
If you’re concerned about your beneficiary’s finances after your passing, an annuity certain can ensure they receive a stipend until the end of the contract.
Higher payouts compared to life annuities
Insurance companies base life annuity payouts on life expectancy. If you live longer, the company has to keep sending disbursements until you die, even if your principal runs out. The insurance company factors in this risk by reducing your withdrawal amounts.
With an annuity certain, insurers know exactly when payments will end, so your distributions are generally higher.
Ideal for bridging income gaps
Most people begin receiving Social Security in their mid-60s. If you plan to retire early, you may want to secure a guaranteed income stream to support you until then. An annuity certain is ideal since you know the payments will last as long as needed. Of course, your payment may be subject to a 10% IRS tax penalty if you begin taking payments prior to age 59 ½.
Types of period certain annuities
Annuities certain offer significant flexibility, allowing for tailored investment strategies. Below are the most common term limits.
5-year certain and life annuity
This hybrid annuity guarantees payments for at least five years. If you’re alive at the end of five years, the product switches to a life annuity and continues paying you directly. But if you die during that time, the annuity sends the distributions from the five-year term to your beneficiary.
After the five-year period ends, nothing passes to a beneficiary. In other words, this payout options removes the financial risk of buying a life annuity and dying right after.
10-year period certain annuity
A 10-year annuity guarantees income for 120 months. Investors often use 10-year certain annuities when they retire at age 60 but want to wait until age 70 to start receiving payments from Social Security.
20-year period certain annuity
This is a popular period for people with long-term income needs, such as those who want to retire in their 50s but maintain a steady income until Social Security begins. Of course payments before age 59 ½ will be subject to an IRS early withdrawal tax penalty on the tax portion of the payout.
When does an annuity certain make sense?
Annuities certain aren’t ideal for every investor, but they can be extremely useful in these scenarios.
Bridging income gaps before Social Security or pension benefits
Say someone retires at 60 but wants to wait until 70 to receive Social Security payments to lock in the highest rates possible. They could consider purchasing a 10-year period certain immediate income annuity for guaranteed distributions until Social Security payments start.
The same strategy works for those waiting on pension benefits to begin. They could purchase a 10-year period certain annuity with a maturity date matching their company’s retirement plan.
Providing structured estate payouts to beneficiaries
Instead of a lump sum inheritance, you can use annuities certain to leave a sum of money to your your beneficiaries in the form of structured payments. This can help provide for beneficiaries while bypassing the estate.
Short-term income replacement for individuals with other retirement assets
If you want to preserve investments like 401(k)s or Roth IRAs for later in retirement, an annuity certain can offer short-term income in the meantime.
Invest in your future with Gainbridge’s annuities
If annuities fit into your savings plan, consider investing with Gainbridge. We have a 30-day free look period that allows you to return your investment within the first month for a full refund. And there are no hidden fees or commissions, so you’ll keep more of your hard-earned funds. Learn more about Gainbridge’s annuities.
This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes.
Guarantees are subject to the financial strength and claims paying ability of the issuing insurance company. Annuities are issued by Gainbridge Life Insurance Company, located in Zionsville, Indiana. Annuities are long-term investment vehicles and contain terms for keeping them in force. You should carefully review the contract terms prior to contributing to an annuity.
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