Annuity Certain: What it Means, How it Works, Criticism

What Is an Annuity Certain?

An annuity certain is an investment that provides a series of payments for a set period to a person or the person's beneficiary or estate. It is an investment in retirement income offered by insurance companies. The annuity may also be taken as a lump sum. Because it has a set expiration date, an annuity certain generally pays a higher rate of return than a lifetime annuity. Typical terms are 10, 15, or 20 years.

Understanding the Annuity Certain

The set expiration date differentiates the annuity certain from a life annuity. The latter provides payouts for the remainder of the annuitant's life and, in some cases, the life of the investor's spouse. A lower payment will be offered for a life annuity because of the uncertainty of the term. Synonyms for annuity certain include years certain annuity, period certain annuity, fixed period annuity, and guaranteed term or guaranteed period annuity.

In the case of the annuity certain, the buyer chooses how long a period the annuity will payout. The payments will continue to be made until it expires, either to the buyer or the buyer's beneficiary.

Is an Annuity Certain Right for You?

An annuity may be useful as a short-term income supplement, but it's not a long-term retirement strategy. That is, the individual who invests heavily in an annuity certain could easily outlive the payment period and be forced to live on a reduced income thereafter.

The annuity certain option might be useful to supplement retirement income for a limited period. For example, if an investor retires at age 62 but wants to wait to collect the full Social Security benefit at age 67, an annuity certain might fill the income gap while providing for a surviving spouse in case of need. Unlike many other investments, the total amount of the payment is guaranteed. That alone makes it an attractive option for some.

Criticism of Annuities

An annuity certain comes with the same negatives as other types of annuities. They can have high fees and upfront charges in comparison with other income options, such as CDs. They may come with a surrender fee that makes them costly to access early.

Some annuities have extremely complex and even exotic terms and conditions that the investor would be wise to read carefully. They often are sold by salespeople working on commission, and that comes out of your payment. Finally, net returns on an annuity are taxed as ordinary income.