Annuities are insurance policies that pay a guaranteed income to you for your entire life. However, they may also pay a guaranteed income for a set number of years. A temporary annuity is an annuity that fixes the payment for a set number of years. Make sure you understand how these annuities work before investing in one.
A temporary annuity converts a large, lump-sum savings amount to monthly payments. It pays a fixed monthly payment to you for five, 10, 15, 20 or more years. In all cases, the length of payment is fixed and does not go on indefinitely. Because of this, the annuity often has the option for beneficiaries. If you die before the payment period ends, your beneficiaries receive the remainder of the payments in the annuity.
The significance of the temporary annuity is that your payments are higher than under a lifetime annuity. This happens as a result of the fact that the temporary annuity payments are for a fixed period of time. The truncated payment period forces more of the lump sum savings to be paid out to you in a shorter period of time.
The benefit of a temporary annuity is that you are able to name a beneficiary for your policy, unlike a lifetime annuity. Your money is never wasted. Under a lifetime annuity, you could theoretically start the annuity and die the next day. If you did, the insurance company would keep the rest of your money. Under a temporary annuity, you or your beneficiaries are guaranteed to get all of your money back with interest.
The disadvantage to a temporary annuity is that you may outlive your temporary annuity payments. If this happens, you will be without an income. Since it's impossible to predict when you will die, the temporary annuity also becomes very risky as a sole source of income.
When considering a temporary annuity, don't place all of your savings into one. Keep in mind that you may outlive your annuity payments. If you do, you'll need more money to buy another annuity if you want to continue receiving a guaranteed income. Additional annuities can be purchased if you set aside a portion of your total retirement savings and invest them for your future.
- "Life Insurance"; Kenneth Black, Jr., Harold D. Skipper, Jr.; 1994
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007