How does a Guarantee Period Impact an annuity?
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Term Certain Annuities pay for a specific period of time. Life Annuities pay for a lifetime.
For a term certain annuity the guarantee period is the length of time that payments are made. For example, a term certain annuity for 10 years has a guarantee period of 10 years. It means that this term certain annuity pays for a term of 10 years, at which time the annuity expires with no further benefit. The same rules apply for any length of term of payment, whether the guarantee period is 5 years or 7 years or 20 years, etc. A term certain annuity has no mortality calculations, nor is consideration given to a person’s age or gender. A term certain annuity simply pays for a stipulated period of time and it is finished. If you die before all payments have been made, then the remaining payments can be paid to a named beneficiary.
So, a guarantee period as it applies to all annuities is a set period of time during which the insurance company issuing the annuity must make payments to the person[s] receiving payments, whether or not that person[s] is alive or dead. If the person[s] receiving the payments dies before the guarantee period is completed, then the remaining payments can be directed to a named beneficiary.
Life pay annuities on the other hand, pay for as long as a person lives. When a guarantee period of more than 0 years is applied to any life pay annuity such as a single life annuity, a joint life annuity, an indexed life annuity, a registered annuity, a non-registered annuity, a prescribed annuity, or a non-prescribed annuity, there is a change in the lifetime payment amount. For non-registered life annuities there is also a change in taxable portion of income. All payments made within the guarantee period must be paid whether the person receiving payments is alive or dead.
In its simplest form a life pay annuity would have a 0 year guarantee period in order to take advantage of a person’s age, gender, mortality calculation and any possible mortality credits. When we are searching the Canadian annuity market for best payout rates, there is a reason for us to do at least one of our searches with a 7 year guarantee period for a non-registered life annuity and a 5 year guarantee period for a registered life annuity because sometimes the best payout rates are posted by insurance companies that have these aforementioned minimum requirements for length of guarantee periods.
Please note that an annuity with 0 years guarantee period completes after first payment, upon your death, or in the case of a joint life annuity, the joint annuity completes upon the final death of the joint annuitant.