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, and then ends. You pay a premium to an insurance company, choose a term (commonly 5 to 20 years) and a locked-in interest rate, and receive equal monthly or quarterly payments until the term expires. It is built to cover a defined income window, such as the gap between early retirement and Social Security, rather than to protect against outliving your savings.
How the Payments Are Calculated
Each payment blends two things: a return of part of your original deposit and interest earned on the balance still with the insurer. The company uses three inputs to set a level payment: your premium, the guaranteed rate, and the number of payments over the term. That amount stays the same from the first payment to the last.
The mechanics resemble a mortgage in reverse. Early payments contain more interest and less principal; later payments flip that ratio. By the final scheduled payment, the insurer has returned every dollar of your premium plus all the guaranteed interest. Nothing is left in the contract after that.
For a rough sense of scale, a $100,000 deposit into a 10-year contract at 4% would produce a level monthly payment calculated to fully deplete the account over 120 months. The exact figure depends on the rate the insurer offers, and rates vary meaningfully between companies. As of early 2026, top guaranteed rates on multi-year fixed annuities run roughly 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 feature is where the “period certain” label earns its name. If you die before the term ends, your named beneficiary continues receiving the remaining scheduled payments until the original term expires. Payments do not stop at death, and the insurer 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 those remaining payments as a lump sum. The available options depend on the specific contract language, so confirm before you sign.
This built-in death benefit is a large part of why fixed term annuities appeal to buyers who worry about “losing” money to the insurance company. With a pure lifetime annuity, payments can stop entirely at death unless you add a rider. Here, the full contract value pays out regardless of when you die.
How It Differs from Other Annuities
The annuity category is crowded, and the fixed term product occupies a specific niche. A few comparisons clear up what it is not.
Versus a Lifetime Annuity (SPIA)
A single premium immediate annuity also converts a lump sum into income starting right away, but it pays for as long as you live. That longevity protection is its purpose, and it lowers the monthly payment compared with a fixed term product funded by the same premium, because the insurer must reserve for the chance you live to 100. A fixed term annuity gives you higher payments over a shorter, defined window, then stops.
Versus a Deferred Annuity
Deferred annuities are savings vehicles with two phases: accumulation, then distribution. A fixed term annuity skips accumulation entirely. It pays income from day one and is purely a distribution tool. If your goal is to grow money for the future, a deferred product fits. If you need income starting now for a defined stretch of years, the fixed term product does.
Versus a Multi-Year Guaranteed Annuity (MYGA)
MYGAs get confused with fixed term annuities because both lock in a guaranteed rate for a set number of years. But a MYGA is a deferred accumulation product: your money grows at the guaranteed rate, and you are not receiving income during the term. At maturity you decide what to do with the accumulated value. A fixed term annuity pays income throughout the term and has nothing left at the end.
How the Payments Are Taxed
Taxation depends on the source of the money you used to buy the contract.
Qualified Funds
If you purchased the annuity with money from a traditional IRA, 401(k), or similar tax-deferred account, every dollar of every payment is taxed as ordinary income. The contributions were never taxed, so the IRS collects on the entire amount when 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 Funds
When you buy the annuity with money you have already paid taxes on, only the interest portion of each payment is taxable. The return of your original deposit is not taxed. The split is set by the exclusion ratio, defined in federal tax law as your investment in the contract divided by the expected total return over the term.3Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
If you deposited $80,000 and the contract will pay out $100,000 in total, the ratio is 80%. That means 80% of each payment is a tax-free return of principal and 20% is taxable interest. The ratio stays constant across every payment in the term.4eCFR. 26 CFR 1.72-4 – Exclusion Ratio
Surrender Charges and Early Access
Fixed term annuities are designed to be held for the full term, and insurers enforce that with surrender charges. If you withdraw more than the allowed amount before the surrender period ends, you pay a percentage of the withdrawn amount as a penalty. These charges typically start at 5% to 7% in the first year and drop by roughly 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 a surrender charge. Beyond that, the declining schedule applies. Many insurers also waive surrender charges for required minimum distributions from qualified accounts, and some contracts include hardship provisions for terminal illness, permanent disability, or 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. 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 biggest structural weakness is that your payments never change. A comfortable payment in year one may buy noticeably less in year ten. At 3% annual inflation, the real purchasing power of a fixed payment drops by roughly 26% over a decade.
Some insurers offer a cost-of-living adjustment rider that raises payments annually, either by a fixed percentage or tied to the Consumer Price Index. The trade-off is that your initial payments are lower, because the insurer prices in the future increases upfront. For a 5-year contract, inflation erosion is usually modest. For a 15- or 20-year term, it is a real financial risk worth addressing.
Buying a Fixed Term Annuity
Work backward from the income you need. Identify the monthly amount, the number of years, and whether the source funds are pre-tax or after-tax. Those three inputs determine the premium required at current rates.
Shopping Rates
Guaranteed rates vary between insurers for the same term, and the differences compound into meaningful dollars over 10 or 15 years. Get quotes from at least three or four companies. Be cautious about chasing the absolute highest rate, because the companies 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 your premium, check the insurer’s financial strength rating from at least one major agency (A.M. Best, Moody’s, S&P, or Fitch). 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 are placing more than $250,000, spreading the money across multiple insurers keeps each contract within your state’s guaranteed limit.
Costs
Fixed term annuities typically have no explicit fees deducted from your account. The insurer’s profit and the selling agent’s commission are built into the spread between what the insurer earns on your premium and the guaranteed rate it pays you. You do not write a separate check for this, but it is factored into the rate. If two products have identical terms and comparable insurer strength, the one with the higher guaranteed rate is giving you more of the spread.
The Free-Look Period
After the contract is issued, most states give you a free-look window of at least 10 days to cancel and receive a full refund with no surrender charge. The length varies by state, and some states extend it for older buyers. Read the contract promptly so you can exercise 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 any riders that were or were not included.