Life only vs. period certain annuities: What’s the difference?

If your annuity has a life only payout structure, you’re guaranteed income for as long as you live. If your annuity has a period certain payout structure, you’ll receive income payments for a specific number of years.

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Katherine MurbachEditor & Licensed Life Insurance AgentKatherine Murbach is a life insurance and annuities editor, licensed life insurance agent, and former sales associate at Policygenius. Previously, she wrote about life and disability insurance for 1752 Financial, and advised over 1,500 clients on their life insurance policies as a sales associate.

Edited by

Antonio Ruiz-CamachoAntonio Ruiz-CamachoAssociate Content DirectorAntonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.

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An annuity is a type of insurance contract in which you pay a series of premiums, and in exchange, you’re guaranteed a stream of income. Many people use annuities to prevent themselves from running out of savings, or to provide themselves with an additional income stream.

When you buy an annuity contract, you have to decide for how long you want to receive income payments. Two of the most common options to choose from are life only and period certain. The main difference between both is the length of the payout period — in other words, how long you’re guaranteed to receive income payments from your annuity.

What is a life only annuity?

A life only annuity refers to any type of contract that guarantees an income stream for life. “The biggest selling point of a life only annuity is the fact you can never outlive it,” says Brian Ford, senior sales associate at Policygenius. 

With a life only annuity, once you enter the payout, or annuitization phase, you’ll continue to receive payments on a regular basis for the rest of your life.

How do life only annuities work?

Life only annuities guarantee that you’ll receive payments no matter how long you live.

When you die, your income stream will stop — the annuity won’t continue to pay out to a beneficiary. This type of annuity distribution typically pays you the maximum amount in income installments compared to the amount of premiums that you paid. This is because even if you pass away prematurely, or shortly after you purchased your annuity, the income payments will stop.

You might also hear the terms “straight life” or “pure annuity” to refer to this payout method. [1]

Learn more about how annuities work

What is a period certain annuity?

A period certain annuity guarantees income payments for a specific length of time — for example, 10, 15, or 20 years. The payments are guaranteed to last for that time period, regardless of how long you — as the annuitant — live. After that time period has passed, the payments will stop.

How do period certain annuities work?

When you buy a period certain annuity, you’ll choose the period during which your income is guaranteed. For example, if you have a 20-year period certain contract, “and the client dies in year five, the annuity would still pay out for the remaining 15 years,” says Amy Shirk, sales associate at Policygenius. In this case, for 15 years, the annuity would pay out to any beneficiary you’ve named in your contract. 

If you — the annuitant — are still living after 20 years, the payments you receive will simply stop once the designated number of years have passed.

What is a life with period certain annuity?

You can also customize your annuity contract by combining elements of both life and period certain annuities. A life with period certain annuity guarantees your beneficiary will receive payments for a certain amount of time, even if you pass away.

  • For example, let’s say you selected this option with a period of 10 years.

  • If you pass away three years after you bought your annuity, your beneficiary will receive payments for an additional seven years.

  • If you pass away 15 or 20 years after you bought your annuity, your beneficiary wouldn’t continue to receive payments, because you’re now outside of the 10-year guarantee period.

  • Regardless, you’ll be guaranteed lifetime income. You’ll just have an additional safeguard should you pass away prematurely.

Because a life with period certain annuity offers an added guarantee, your income payments will be smaller with this payout schedule than they would be with a life-only payout schedule. [2]

What are the main differences & common features between life only & period certain annuities?

The main difference between life only and period certain annuities has to do with the payout period — also called the annuitization phase — which is detailed above.

Aside from that, the terms “life only” and “period certain” can apply to a number of different types of annuities — including fixed, indexed, and variable annuities. Here are the other basic features of annuities and how they may apply to your contract.

Premiums & accumulation period

Your accumulation period is when you pay premiums and contribute funds toward your annuity contract. You can typically either pay with a lump sum or a series of payments over time. If you choose to pay with a lump sum, you can use money from an IRA or 401(k) plan. You can also use other savings, or proceeds from the sale of a house, for example.

Withdrawals & surrender period

Many annuities come with a surrender period, which is the time during which you can’t withdraw funds without paying an extra fee. The surrender period is usually between five and 10 years if you have a deferred annuity — meaning that your income payments don’t start immediately. 

Surrender fees can also decrease over time. For instance, you might pay a 7% penalty if you withdraw funds in the first year after you purchased your annuity, but only a 5% penalty if you withdraw funds during year three. [3]

If you have an immediate annuity — meaning your income payments start within a year — you likely won’t have a surrender period.

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Returns or earning potential

Your returns will depend on the type of annuity you purchase, rather than your payout method.

  • Fixed annuities offer you a fixed rate set by your insurer, and a guaranteed minimum rate of return.

  • Indexed annuities allow your funds to grow based on the performance of a market index. The insurer sets caps and floors to regulate your earnings — so you can’t earn beyond a certain threshold, but your losses will be limited, too.

  • Variable annuities allow your funds to grow based on the performance of your selected investments. This type of annuity generally exposes you to the most market risk, but your earning potential is higher than with other types.

Learn more about the different types of annuities

Tax implications

The same type of tax implications apply to life only and period certain annuities. You’ll only pay taxes when you reach the payout phase and you start receiving income.

If you fund your fixed annuity with post-tax dollars (also called non-qualified funds), you’ll only pay taxes on the interest earned, rather than taxes on both the principal and the interest.

If you fund your annuity with pre-tax dollars (also called qualified funds) — for example, with money from a 401(k) or an IRA — you’ll pay taxes on the principal and the interest when you take a withdrawal.

Because annuities are tax-deferred, you’ll pay an additional 10% tax for early withdrawals if you withdraw funds while you’re under age 59 ½ — regardless of the type of annuity you own. [4]

Life only vs. period certain annuities: Comparing the main differences & features

Feature

Life only annuity

Period certain annuity

Premiums

Installments or lump sum

Installments or lump sum

Accumulation period

Immediate or deferred

Immediate or deferred

Annuitization

Guaranteed for life

Guaranteed for a specific number of years (often 10 or 20)

Penalty for early withdrawals

Yes, 10% after 59 ½ years old

Yes, 10% after 59 ½ years old

Surrender period

Depends on the insurer

Depends on the insurer

Investment options

Fixed, indexed, or variable

Fixed, indexed, or variable

Tax-deferred 

Yes

Yes

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Who should consider a life only annuity?

If you don’t have dependents, or you don’t need to provide any extra funds for your dependents, you might consider a life only annuity. This ensures that you have an income stream for as long as you live — and you’d typically get a larger monthly installment than you would if you selected a life with period certain annuity. 

“If you’re in great health and you’re confident you’re going to live a long time” a life only annuity could be advantageous, says Ford of Policygenius.

Are annuities a good investment?

Who should consider a period certain annuity?

If you’re using an annuity to complement other income streams, and you want to control exactly when and for how long your payments last, you could consider a period certain annuity.

“Period certain annuities are valuable because they can provide you with a large sum of money each month,” Ford says. “So if you’re annuitizing your 401(k) after retiring and still have a mortgage with eight years left, for example, you may do a period certain to cover those eight years.”

If you’re not sure which type of annuity is the best fit for your situation, speaking with a financial advisor or an annuities professional can help you understand your options.

Explore other annuity options

References

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Policygenius uses external sources, including government data, industry studies, and reputable news organizations to supplement proprietary marketplace data and internal expertise. Learn more about how we use and vet external sources as part of oureditorial standards.

  1. NC Department of Insurance

    . "

    Annuity options

    ." Accessed May 24, 2024.

  2. Wisconsin Office of the Commissioner of Insurance

    . "

    Consumer's guide to understanding annuities

    ." Accessed May 24, 2024.

  3. Insurance Information Institute

    . "

    What are surrender fees?

    ." Accessed May 24, 2024.

  4. IRS

    . "

    Publication 575 (2023), Pension and Annuity Income

    ." Accessed May 24, 2024.

Author

Katherine Murbach is a life insurance and annuities editor, licensed life insurance agent, and former sales associate at Policygenius. Previously, she wrote about life and disability insurance for 1752 Financial, and advised over 1,500 clients on their life insurance policies as a sales associate.

Editor

Antonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.

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