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What is a Term Certain Annuity?

Money Manager | Monday, June 7th, 2010

What is a Term Certain Annuity?

A term certain annuity is an insurance product which is designed to provide a person with predetermined payments over a designated period of time. Term certain annuities can be purchased gradually over many years, with the person making regular payments towards the total purchase amount. However, these are often purchased at the time of a person’s retirement, using one lump sum of retirement funds. The main thing to keep in mind when purchasing a term certain annuity is that they are designed for a specific timeframe. Once the overall term has expired, there can be no further payments made.

What are some things to think about when considering a term certain annuity?

The overall term length of the annuity is one of the most important things to consider. Because annuities are designed for a particular timeframe, it is possible to outlive your annuity. If the annuity is your only planned resource in regards to your retirement, you might find yourself without any further means of support if the term of the annuity expires. Because of this, a term certain annuity can be a great enhancement to an overall retirement plan, but it should never be the entire financial plan. It can be helpful to seek out the advice of a good financial planner if you are contemplating the purchase of a term certain annuity.

What are the advantages of a term certain annuity?

Term certain annuities are a good choice if somebody is looking to help stabilize other forms of investment income after retirement. They are also a good choice for those who may not have been fully employed earlier in life, and as such, may not have a 401(k) plan or other retirement option. One of the advantages of an annuity is that there is a guaranteed fixed rate of return, which can help take some of the guesswork out of retirement. With careful planning, a term certain annuity can provide a dependable source of income that is not affected by fluctuating interest rates or the stock market, which can provide a lot of peace of mind. They are also much less expensive than a life annuity, since there aren’t any insurance components involved.

What are the disadvantages of a term certain annuity?

One of the primary concerns with a term certain annuity is the chance that it may run out of funds while the person is still alive. If a person is counting heavily on the regular payments provided by the annuity as their income after retirement, they could run into problems if they live longer than they expect. Although one of the advantages of an annuity is the fixed rate of return, this can also be a disadvantage under certain circumstances. In many cases, other types of investments can offer a better return. The annuity will continue to provide payments up to a specified date, regardless of the circumstances that occur during this time period. If the person dies before that date, the remainder of the annuity’s value is kept by the insurance company. These annuities do not take beneficiaries into account, and there are no insurance components to the plan. If a person’s health begins to falter and their medical bills increase, the payments will not increase in a corresponding fashion. For those who are looking for the assurance of insurance benefits, or for those who wish to provide their beneficiaries with the remainder of the annuity’s value, a life annuity could be a better choice.

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