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A period certain is an option that is offered with many types of annuities. Instead of a lump sum payment of the annuity, the annuitant, or the recipient of the annuity payment, can choose to receive the balance of the annuity in regular installments over a specified number of years. This approach allows the recipient to enjoy a steady flow of income without interruption for that specified period of time. In other words, the source of income is considered certain for that pre-defined period of time.
The designation of a period certain is only one option available with the payment of annuities. Many financial plans that provide annuity payments offer the option of receiving regular payments for as long as the annuitant lives. The benefit here is that the recipient is guaranteed some amount of income up to the point of death, although the amount of those payments may or may not be as much as with a period certain.
One of the benefits of a period certain arrangement is that the recipient does not have to pay taxes on the entire annuity during one specific tax period. By breaking down the receipt of the annuity into installments that are remitted over a number of years, there is only a need to pay taxes on the amount that is received in each relevant tax period. This process can sometimes prevent the recipient from being placed into a higher tax bracket where a higher percentage of taxes on his or her annual income becomes due.
Another advantage to a period certain arrangement is that most plans of this type can be transferable in the event that the annuitant should die. Assuming that a beneficiary was previously designated, the fund or plan that issues the life annuity payment simply reroutes the installment payments to that beneficiary. Those installment payments continue until the terms of the period certain are fulfilled. This creates a simple but effective way of providing for a spouse or other loved one even after the annuitant is no longer alive.
One potential drawback to a period certain arrangement is that the annuitant may live for more years than is covered by the installment terms of the payment option. In this scenario, the annuitant could reach a point where he or she experiences a significant drop in income as the terms of the period certain are fulfilled. For example, if the annuitant at the age of sixty-five decides to enter into a period certain payout option that involves monthly installment payments over the next fifteen years, that means the recipient will not continue to receive annuity payments after the age of eighty. Should the individual live several more years, he or she would have to rely on other sources of income in order to remain self-supporting.