What is a Life Income with Period Certain Option?
A life income with period certain option is a life insurance payout plan that provides lifetime income while also guaranteeing the money is paid out in installments for a certain period. If the beneficiary dies during that period, those payments get distributed to the person they name until the period ends.
Spreading out a life insurance payout
When someone names you as the beneficiary for their life insurance policy and passes away, you can make a claim against their life insurance policy. Once approved, the life insurance company pays you the policy’s death benefit, a usually sizable sum of money.
For many decades, those payouts were made almost exclusively as a lump sum. But getting a large sum of money all at once presented financial management challenges for a lot of people. To aid beneficiaries, life insurers now offer a variety of payout options.
Today, if you receive a life insurance payout, you will likely have the option to receive the money as a lump sum or in a different way. Many people choose to have that money placed into an annuity, for example, so they can be paid out in installments over time.
This creates a reliable income stream that can make money management easier through the years. If you choose to do this type of annuity-based installment plan, you’ll need to decide how it should work for you.
Life income options
If you put the death benefit into an annuity, you work with the insurer to determine how frequently you’ll receive payments (e.g., monthly, annually) and how much each payment will be. You’ll also need to decide if you want a lifetime income payout option, fixed amount option, or a lifetime income with period certain option.
- Life income. Also called lifetime income, this annuity pays you a regular amount based on how long the insurer expects you to live. This option guarantees payments for as long as you’re alive. That means if you live past the insurer’s expectations and they’ve already exhausted the death benefit, they still need to continue making payments to you, drawing money from another source. The downside, though, is that if you die early into the payment plan, the money doesn’t get redirected to anyone else. Instead, the insurer absorbs it.
- Fixed amount. With this option, the insurer distributes the payout over a predetermined number of installments. You might choose to have your fixed amount payments continue for 20 years, for example. In this case, the amount you’ll get per payment is relatively simple. Your insurer will divide the death benefit by the number of months or years for which you want to receive payments, arriving at the amount paid per installment.
- Life income with period certain. This choice combines life income with a fixed amount structure. With this hybrid option, you get payments for your life, along with guaranteed payments for a set period (i.e., the period certain), usually a decade or two.
The major benefit of a lifetime income with period certain option arises if you pass away within the period. With a life income option, the payments from the annuity stop when you die. But with life income with period certain, the payments are guaranteed for the period. If you pass away, the insurer continues making payments to an individual you named until the end of the period.