What it means
The option appears when someone converts a lump sum into an income stream, usually at retirement. The insurer promises a monthly amount for life and attaches a certain period, commonly 5, 10, 15 or 20 years, during which payments are made whatever happens.
The word continuous refers to the life element carrying on after that certain period has expired. The business logic is risk sharing.
A life-only income gives the largest monthly payment because the insurer keeps the balance if the recipient dies early, while a certain period hands some of that value back to the family. The recipient pays for the protection through a smaller monthly cheque.
Pricing is driven by mortality tables and interest rates, so the longer the certain period the lower the monthly payment. The gap is usually modest at 5 or 10 years and widens sharply at 20 years, because a long guarantee removes most of the insurer's gain from early deaths.
Comparing quotes across several certain periods is the only reliable way to see what the guarantee actually costs. In practice the option is chosen by people with dependants, a mortgage still running or a child in education.
It is also used in legal settlements and in some pension arrangements where a minimum payout has to be demonstrated. The certain period is often set to match the years in which the family would be most exposed.
Two points are routinely confused. The guarantee is a minimum and not a maximum, so someone who lives 30 years beyond a 10 year certain period keeps receiving payments for all of them.
The beneficiary inherits the remaining instalments rather than a lump sum, unless the contract allows commutation, which means converting the outstanding payments into a single sum. The promise is only as strong as the insurer behind it, because it is a contractual claim on that company.
Credit quality and the existence of any national or state guarantee scheme therefore deserve as much attention as the headline monthly figure.
In practice
Real-world examples.
Example
A 62 year old warehouse supervisor has $90,000 left on his mortgage with 11 years to run. He selects a 15 year certain and continuous option so that, if he dies early, his wife keeps receiving the monthly payments long enough to clear the loan. The option costs him about 7% of his monthly income compared with the life-only quote.
Example
A personal injury settlement is structured as an annuity for a claimant in her forties. The court requires a 20 year certain period so that a minimum value reaches her children if she dies young. The insurer quotes a lower monthly figure, and the certain period is written into the settlement agreement.
Example
A retiring dental practice owner compares three quotes on a $400,000 pot: life only, 10 year certain and continuous, and 20 year certain and continuous. Seeing that the 20 year guarantee costs nearly 15% of his monthly income, he takes the 10 year version and buys a small term life policy to cover the rest.
Formula
Calculation
Monthly income under a certain and continuous option = Life-only monthly income - the cost of the guarantee
Guaranteed minimum total = Monthly income x Number of months in the certain period
A 65 year old converts a $500,000 pension pot into an annuity. The life-only quote is $3,000 a month. The 10 year certain and continuous quote is $2,800 a month, so the guarantee costs $200 a month, or $2,400 a year.
The guaranteed minimum is 120 payments x $2,800 = $336,000. If the recipient dies after exactly four years, having received 48 payments worth 48 x $2,800 = $134,400, the named beneficiary receives the remaining 72 payments, worth 72 x $2,800 = $201,600.
If instead the recipient lives for 25 years, payments continue for all 300 months, totalling 300 x $2,800 = $840,000, and the certain period never comes into play. That is the trade: $2,400 a year of income given up in exchange for protecting $201,600 in the worst case.Case study
Seen in the real world.
Harbour Loom Textiles is an illustrative, fictional family weaving business used here to show how the choice plays out in practice. Its founder retired at 66 with a $600,000 pot, a wife eight years younger and a grandson whose school fees he had promised to fund for the next decade.
The life-only quote was the highest monthly figure on the table, and in this fictional example he nearly took it on the basis that it was simply the best income. His adviser laid the quotes side by side and showed that a 10 year certain and continuous option cost roughly $240 a month but guaranteed a little over $390,000 regardless of what happened.
He chose the guarantee and died six years later. The remaining four years of payments went to his wife, which covered the school fees his family had been counting on. The illustrative point is that the question is not which option pays most, but which risk the household can least afford to carry.
Watch out
Common mistakes.
- Reading the certain period as the full length of the annuity, when it is the guaranteed minimum and payments continue for life afterwards.
- Choosing the longest certain period available without pricing it, which can hand back a tenth or more of the monthly income for protection the family may not need.
- Assuming the beneficiary receives a lump sum, when most contracts pay out the remaining instalments on the original schedule unless commutation is specifically allowed.
Questions
People also ask.
How is this different from a joint and survivor annuity?
A joint and survivor option pays for as long as either of two named people lives, while a certain and continuous option guarantees a set number of payments to whoever is named, then continues for the original recipient's life only.
Who should consider a long certain period?
People with debts, dependent children or a much younger partner, because those are the situations where an income stopping after a few payments would cause real harm.
Does the guarantee protect against the insurer failing?
No, it is a contractual promise from that insurer, so the company's financial strength and any applicable protection scheme should be checked before signing.
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