When it comes to planning for retirement, many individuals consider purchasing an annuity to ensure a stable income stream throughout their golden years. Annuities offer various payout options, and one such option is the "Life with Period Certain." In this article, we will delve into the details of this annuity payout option, its advantages, and important considerations for individuals seeking financial security in retirement.
Understanding the 'Life with Period Certain' Option:
The "Life with Period Certain" annuity payout option provides the annuitant with a guaranteed income for as long as they live. However, if the annuitant passes away before a specified period, known as the "period certain," expires, the insurance company continues the income payments to the designated beneficiaries until the period certain ends. For example, if the period certain is set at 20 years, the option is referred to as "Life with 20 Years Certain."
Higher Payout Rate and Risk Assessment:
The payout rate for a "Life with Period Certain" annuity option is determined by the insurance company's assessment of mortality tables and potential losses. Generally, the fewer years that are certain, the higher the payout rate. This is because the insurance company is taking into account the likelihood of having to make payments for a shorter period.
Comparing 'Life Only' and 'Life with Cash Refund' Options:
In contrast to the "Life with Period Certain" option, the "Life Only" payout option offers the highest payout rate but does not provide any further payments to beneficiaries upon the annuitant's death. With the "Life Only" option, the insurer's obligation ceases once the annuitant passes away.
On the other hand, the "Life with Cash Refund" or "Installment Refund" option ensures that any remaining principal is paid to the beneficiary either as a lump sum or in installments. The payout rate for the "Cash Refund" option is typically comparable to a "Period Certain" payout lasting between 13 to 18 years. Insurance companies often mark this crossover point on the illustrations provided to potential annuity buyers.
Balancing Period Certain and Payout Amount:
Choosing a longer period certain in the "Life with Period Certain" option reduces the payout amount. Opting for more years certain implies a higher likelihood of the insurance company having to make payments for an extended duration. Consequently, the insurance company adjusts the payout rate to account for this increased risk.
Benefits of the 'Life with Period Certain' Option:
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Guaranteed Lifetime Income: The primary advantage of the "Life with Period Certain" option is that it ensures a steady income for the annuitant throughout their lifetime. This can provide peace of mind, especially for individuals concerned about outliving their retirement savings.
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Beneficiary Protection: By including a period certain in the annuity contract, individuals can safeguard their beneficiaries' financial well-being. In the event of the annuitant's premature death, the beneficiaries will continue to receive income payments until the period certain ends.
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Flexibility: The "Life with Period Certain" option offers some flexibility compared to the "Life Only" option. It allows the annuitant to customize the annuity to align with their financial goals, balancing the desire for a higher payout rate with the need for beneficiary protection.
Important Considerations:
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Longevity and Financial Objectives: Annuity buyers should consider their life expectancy, health condition, and financial goals when choosing between different payout options. Assessing personal circumstances and consulting with a financial advisor can help individuals make an informed decision.
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Impact on Payout Rate: Increasing the number of years certain in the "Life with Period Certain" option will decrease the payout rate. Individuals should carefully evaluate their risk tolerance, financial obligations, and the potential impact on their retirement lifestyle when selecting the appropriate period certain.
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Insurance Company Selection: When purchasing an annuity, it is crucial to research and select a reputable insurance company. Considering the insurer's financial strength, customer service reputation, and product offerings can help ensure a secure and reliable income stream in retirement.
Summary
In a “life with period certain” annuity payout option, the insurance company will pay the annuitant a set income for as long as the annuitant lives.
If the annuitant dies before the “period certain” expires, the company will continue to pay the income to the beneficiaries until the period certain expires. If the period certain is 20 years, it would be called a “Life with 20 Years Certain” payout option.
The fewer number of years that are certain, the higher the payout rate, because the insurance company is weighing its potential loss against mortality tables.
For instance, with no period certain or cash refund, the payout is called a Life Only option, and the insurer doesn’t owe anyone else a dime once the annuitant dies: in this situation, they will agree to pay the highest amount because there is a chance that they won’t have to pay it long.
The other option, Life with Cash Refund or Installment Refund, means that the insurer will pay any unused principal to the beneficiary in a lump sum or installments. Typically the rate offered for a Cash Refund option is similar to a Period Certain payout of between 13-18 years, and the insurer will often mark that crossover point on the illustrations.
Once you cross that point and choose to have more years certain, your payout will be less than the Life with Cash Refund or Installment Refund Option.
What is the “Period Income” Option on Annuities?
What is the “Life Only” Option on Annuities?