A 70-year-old client is receiving income payments from an annuity. They elected a 'life with period certain' payout option, with a 10-year period certain. If the client dies after 7 years, how will the remaining payments be handled?
- AA lump sum equal to the present value of the remaining payments will be paid to the client's estate.
- BThe annuity company will retain the remaining payments.
- CThe remaining payments will continue to the client's designated beneficiary for 3 more years.
- DAll remaining payments cease immediately.
Show answer & explanationAnswer & explanation
Correct answer: C. The remaining payments will continue to the client's designated beneficiary for 3 more years.
Under a 'life with period certain' payout option, the annuity guarantees payments for the annuitant's lifetime OR for a specified period (the 'period certain'), whichever is longer. If the annuitant dies before the period certain expires, the remaining guaranteed payments continue to be paid to the designated beneficiary for the remainder of the period. In this case, 10 years (period certain) - 7 years (payments received) = 3 years of remaining payments.
Why the other options are wrong
- A. While some options might allow a lump sum, the standard handling for 'period certain' is to continue periodic payments.
- B. This is incorrect; the contract guarantees payments for the period certain.
- D. This would be true for a 'straight life' annuity, but not for 'life with period certain'.
Life with Period Certain Annuity Payout
An annuity payout option that guarantees income payments for the annuitant's lifetime, but also guarantees payments for a minimum 'period certain' (e.g., 10 or 20 years). If the annuitant dies before the period certain expires, the remaining payments go to a beneficiary.
- Guarantees income for life AND for a minimum period
- If annuitant dies during the 'period certain', payments continue to beneficiary
- If annuitant lives beyond the 'period certain', payments continue for their life
- Offers a balance between lifetime income and beneficiary protection
- Payments are lower than a straight life annuity due to the guarantee
Memory trick: Period Certain: Live long, or guarantee the rest to your kin.