A fixed term annuity is an insurance contract that converts a lump sum into a guaranteed stream of level income payments for a set number of years, then ends. You pay a premium to an insurance company, choose a term (commonly 5 to 20 years), and receive fixed monthly or quarterly payments at a locked-in interest rate for the length of that term. Unlike a lifetime annuity, which is designed to protect against outliving your savings, a fixed term annuity covers a defined window, such as the years between an early retirement and the start of Social Security or a pension.
How the Payments Are Calculated
Each payment blends two things: a return of part of your original deposit and interest earnings on the balance still held by the insurer. The company uses three inputs to set a level payment amount: your premium, the guaranteed interest rate, and the number of payments across the term. That payment does not change from the first month to the last.
The math resembles a mortgage in reverse. Early payments contain more interest and less principal; later payments flip the ratio. By the final scheduled payment, the insurer has returned every dollar of your premium plus all guaranteed interest, and nothing remains in the contract.
A rough example: a $100,000 premium placed in a 10-year fixed term annuity at a 4% guaranteed rate would produce a level monthly payment designed to fully deplete the account over 120 months. The exact dollar figure depends on the rate the insurer offers, and rates vary meaningfully between companies. As of early 2026, top-line guaranteed rates on multi-year fixed annuities range roughly from 5% to over 6% for five-year terms, though the highest rates often come from smaller, lower-rated insurers.
What Happens if You Die During the Term
This is where the “period certain” label earns its name. If you die before the term ends, your named beneficiary continues receiving the remaining payments on schedule until the original term expires. Payments do not stop at your death, and the insurance company does not keep the balance.
If you bought a 15-year contract and died in year 8, your beneficiary would receive the remaining 7 years of payments. Some contracts also let the beneficiary take the commuted present value of the remaining payments as a lump sum. Which options apply depends on the contract language, so confirm it before signing.
This built-in death benefit is one reason people prefer a fixed term product to a pure lifetime annuity. With a lifetime annuity, payments can stop entirely at death unless you add a rider. With a fixed term product, the full contracted value is paid out regardless of when you die.
How It Differs From Other Annuity Products
The annuity category holds several products that sound similar and behave differently. Three comparisons matter most.
Fixed Term Versus Lifetime (SPIA)
A single premium immediate annuity, or SPIA, also converts a lump sum into immediate income, but it pays for as long as you live. That longevity protection is its core value. The trade-off is that monthly payments from a SPIA are lower than those from a fixed term annuity funded with the same premium, because the insurer must reserve for the possibility you live to 100. A fixed term annuity delivers higher payments over a shorter, defined window and then stops.
Fixed Term Versus Deferred
Deferred annuities are savings vehicles with two phases: accumulation and later distribution. Money grows at a guaranteed or market-linked rate, and you decide later whether to withdraw or annuitize it. A fixed term annuity skips accumulation entirely. It begins paying immediately and is purely a distribution tool.
Fixed Term Versus MYGA
Multi-year guaranteed annuities are often confused with fixed term annuities because both lock in a guaranteed rate for a set number of years. A MYGA is a deferred accumulation product: your balance grows at the guaranteed rate, but you are not receiving periodic income during the term. At the end of the guarantee period, you decide what to do with the accumulated value. A fixed term annuity, by contrast, pays income from day one and has nothing left at the end.
How the Income Is Taxed
Tax treatment depends on where the money came from when you bought the contract.
Qualified Money
If you funded the annuity from a traditional IRA, 401(k), or other tax-deferred retirement account, every dollar of every payment is taxed as ordinary income. The original contributions were never taxed, so the IRS collects on the entire amount as it comes out. The insurer reports these distributions on Form 1099-R.1Internal Revenue Service. About Form 1099-R
If you are younger than 59½ when payments begin, an additional 10% early withdrawal tax applies on top of ordinary income tax unless you qualify for an exception.2Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Non-Qualified Money
When you buy an annuity with money you have already paid taxes on, the IRS does not tax the return of your original deposit. Only the interest portion of each payment is taxable as ordinary income. The split is set by the exclusion ratio, which federal tax law defines as your investment in the contract divided by the expected total return over the annuity’s term.3Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
In practice: if you deposited $80,000 and the annuity will pay out a total of $100,000 over its term, the exclusion ratio is 80%. That means 80% of each payment is a tax-free return of your money, and the remaining 20% is taxable interest. The ratio stays constant across every payment for the life of the contract.4eCFR. 26 CFR 1.72-4 – Exclusion Ratio
Getting Money Out Early
Fixed term annuities are built to be held for the full term, and insurers enforce that expectation with surrender charges. If you withdraw more than the allowed amount before the surrender period ends, you pay a penalty calculated as a percentage of the amount withdrawn. Charges typically start at 5% to 7% in year one and decline by about one percentage point per year until they reach zero.
Most contracts include a free withdrawal allowance of up to 10% of the account value each year without triggering the surrender charge. Beyond that, the declining schedule applies. Many insurers waive surrender charges for required minimum distributions from qualified accounts, and some contracts include hardship provisions that allow penalty-free access if the owner is diagnosed with a terminal illness, becomes permanently disabled, or requires extended nursing home care.
The insurer’s surrender charge is separate from the IRS’s 10% early withdrawal tax. You can owe both at once if you pull money out before age 59½ during the surrender period. The money you put into a fixed term annuity should be money you are confident you will not need for other purposes during the term.
Inflation Risk
The main structural weakness of a fixed term annuity is that payments never change. A dollar amount that feels comfortable in year one may buy noticeably less by year ten if inflation runs above its historical average. Over a 10-year term at 3% annual inflation, the real purchasing power of a fixed payment falls by roughly 26%.
Some insurers offer a cost-of-living adjustment rider that raises payments each year, either by a fixed percentage or in step with the Consumer Price Index. Your initial payments will be lower because the insurer is front-loading the cost of those future increases into the pricing. For a 5-year contract, inflation erosion is usually modest. For a 15- or 20-year term, it is a real risk worth addressing.
How to Buy One
Work backward from the income you need. Identify the dollar amount required each month, the number of years you need it, and whether the source funds are pre-tax or after-tax. Those three inputs determine the premium required at current rates.
Shopping for Rates
Guaranteed rates vary between insurers for the same term length, and the differences compound into meaningful dollar amounts over 10 or 15 years. Gather quotes from at least three or four companies. Be cautious about chasing the highest number on the page. The insurers offering top-of-market rates are sometimes smaller or lower-rated.
Checking the Insurer
Your annuity is only as reliable as the company behind it. Before committing, check the insurer’s financial strength rating from at least one major agency (A.M. Best, Moody’s, S&P, or Fitch). These ratings assess whether the company has the reserves to honor its obligations decades from now. A higher rate from a financially shaky insurer is not a bargain.
As a backstop, every state operates a life and health insurance guaranty association that steps in if an insurer becomes insolvent. In all states, annuity contracts are protected for at least $250,000 per owner, per failed insurer, with some states covering $300,000 to $500,000 depending on the contract’s payout status.5NOLHGA. The Nation’s Safety Net If you plan to invest more than $250,000, spreading the money across multiple insurers keeps each contract inside your state’s protected limit.
The Free-Look Period
After the contract is issued, most states give you a free-look window of at least 10 days during which you can cancel and receive a full refund of your premium with no surrender charge. The exact length varies by state, and some states extend it to 20 or 30 days for older buyers. Read the contract promptly so you can act on this right if anything does not match what you were told during the sales process. Pay particular attention to the surrender charge schedule, the beneficiary designation, and which riders were included or excluded.