Term Certain Annuity

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."

Understanding a Term Certain Annuity

An annuity is a financial product designed to pay a steady income stream over time. When an investor buys an annuity, they agree to pay either a lump sum amount or make a series of deposits to a financial institution, such as an insurance company. Usually, lump-sum purchases are made at, or shortly after, the annuitant's retirement. In turn, the financial institution pays the annuitant distributions beginning on a specific date, whereby the payments can continue for a fixed period or until the annuitant passes away. 

Typically, annuities are used as retirement vehicles to provide a steady income to retirees. The annuity contract stipulates the date at which the distributions are to begin being paid to the annuitant. 

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, and the period lengths can range from five to 30 years.

Criticisms of Term Certain Annuities

The main risk involved in purchasing a term certain annuity is the potential of outliving its payments and being left with no money to live on. Also, the deposits into some annuities can be locked up for a period of time, which is called the surrender period. In other words, the annuitant may not be able to access the money early without incurring a penalty.

As a result, term certain annuities should only be purchased under the guidance of a reputable financial professional. Term certain annuities are typically likely 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.