A fixed period payout is a type of annuitization option that pays out an annuity’s value over a certain number of years, rather than a lifetime. A fixed period payout is also known as a period certain annuity.
If the annuity owner elects a fixed period payout, they will choose the number of years that they will receive income. Most insurance companies allow fixed periods between 5 and 30 years.
At the end of the fixed period, no more money is paid to the annuity owner. If the owner dies before the end of the fixed period, some sort of death benefit will typically be paid to the annuity’s beneficiary.
The Annuity Lifecycle
Annuities are long-term insurance contracts intended for retirement planning. Annuities have two phases: the deferral period and the annuity period.
During the deferral period, the investment in the annuity grows at a fixed interest rate, a market-linked rate, or based on the performance of the underlying investments.
The deferral period usually lasts several years or even decades.
Once the owner of the annuity is ready to begin taking income, they ‘annuitize’ the contract, which begins the annuity phase. At that time, the value of the annuity is converted into a stream of income payments. The owner decides how to structure these payments, and they can be guaranteed for life, guaranteed for a certain period, or a combination of the two.
Annuities are tax-deferred, meaning that taxes on gains are not due until income is taken from the annuity. If the annuity was funded with money that has already been taxed, then a portion of each annuity payment will be subject to income tax. If the annuity was funded with pre-tax, or ‘qualified’ money, then each income payment will be fully taxable.
Fixed Period Payout Death Benefits
As mentioned earlier, if the annuity owner died before the end of the fixed period, their beneficiary is usually paid a death benefit.
The most common death benefit for fixed period payouts entitles the beneficiary to continue receiving income payments until the period ends.
A ‘cash refund’ death benefit may also be available. Under this death benefit, the beneficiary will receive one lump-sum payment for the total amount that they would receive had they continued payments until the end of the period.
Variations of the Fixed Period Payout
In addition to the fixed period-only payout, income can be structured to be paid for the longer of a person’s life or a fixed period. This retirement planning benefit ensures that the annuity owner will never run out of income, but will also leave something for their loved ones should the owner die before the end of the fixed period.
Fixed period payouts may also be structured to cover an individual and their spouse. Under this payout option, income payments are guaranteed for the lives of two people. If both covered persons die before the end of the fixed period, payments will still continue to the beneficiary until the end of the period.