There are two types of what we call “fixed annuities”. The term “fixed” come from the payment of the annuity. Therefore, a fixed annuity is offering a fixed… payment. It is usually a monthly income stream that is paid during the time of the contract. This is where the two types of fixed annuities come: Life Annuity and Term Certain Annuity.
The life annuity is paid to the beneficiary upon his death. Once the beneficiary passes away, the remaining part of the annuity is left to the Life Insurance Company. This is a good product for investors who are in good health and plan to live longer. For more information, we cover life annuities in this section.
Term Certain Annuity
The term certain annuity provides a steady stream of income to the beneficiary until the contract expires. Therefore, if an investor purchase a 10 year annuity at the age of 55 and die at the age of 58, the Life Insurance Company will keep the rest of the money.
***I’ve read on Canadian Insurance Company sites that some term certain annuities can pay a lump sum payment equal to the remaining benefit of the annuity to your beneficiary (similar to a life insurance clause).
Term Certain Contract Main Advantage
The main advantage of term certain annuity is its cost. Since the annuitant (the life insurance company) doesn’t have to pay you until you pass away, it will simply have to consider a conservative investment projection and pay you accordingly.
This could be a great product if you seek for a temporary stream of income and you are not looking to add any life insurance component to your contract (in order to guarantee your payment over time for example).
Since there are no free lunches in finance, term certain annuities are cheap but not perfect. In fact, chances are that you will outlive the term of your annuity and be left with no money and no income stream after the maturity date.
Imagine a scenario where you purchase a 15 years term certain annuity at the age of 55 and blow your 70th anniversary candles? That’s right, you’ll be crying that you are still alive since you will not be receiving any more money from your contract.
When Should I Purchase a Term Certain Annuity?
A term certain annuity is a good product if you only need income for a specific period (to cover your most active period of your retirement for example) or if you can’t afford to pay for a better contract (with insurance or additional return included).
Since I’ve found term certain contracts offering the remaining benefits in the event the investor decease prematurely, I suggest you speak with an adviser to know which contract is good in your state/province.