Annuities are typically insurance policies that pay a guaranteed income to you for your entire life. Usually, people think of annuities as either variable or fixed, but they can also be temporary in term instead of lifetime. A temporary annuity is an annuity that fixes the payment for a set number of years. These types of annuities are also known as term certain or period certain annuities precisely because the payments and number of years are fixed. Make sure you understand how these annuities work before investing in one.
What's the Function of a Temporary Annuity?
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.
Temporary annuities can be added to a life insurance policy or joint-survivor annuity in addition to other options. There are other payout options that can include life with term certain.
What Are the Benefits of a Temporary Annuity?
A major 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. Another benefit to a temporary annuity is knowing exactly how many payments and the total amounts to be paid to you or your beneficiary.
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. Payments are also larger through a temporary annuity than a straight-life annuity when the expected lifetime is longer than the term of the annuity.
Are There Disadvantages to Temporary Annuities?
While it may be comforting to know that a beneficiary is eligible to receive temporary annuity payments after the annuitant passes away, that is not really the most useful intended purpose served by annuities. Mortality credits enable annuitants to continue receiving payments when they outlive their expected lifetime. Cutting the annuity payment period to a length of time that is shorter than the annuitant's expected lifetime might not yield the primary benefit of an annuity – which is to receive guaranteed payments until death.
With that in mind, the major disadvantage to a temporary annuity is that you may outlive your temporary annuity payments. If this happens, you will be without an income source. Since it's impossible to predict with certainty when you will die, the temporary annuity also becomes very risky as a sole source of income.
How Can a Temporary Annuity Fit Into Retirement?
When considering a temporary annuity, don't place all of your savings into one. Keep in mind that you very well 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. If you are primarily concerned about protecting your beneficiaries, there are other investment strategies that might better suit your needs.
It is a good idea to consult a retirement professional regarding your specific needs from an annuity in relation to your retirement goals.
I am a Registered Financial Consultant with 6 years experience in the financial services industry. I am trained in the financial planning process, with an emphasis in life insurance and annuity contracts. I have written for Demand Studios since 2009.