An annuity guarantee period is the most misunderstood of all terms relating to annuities. A guarantee period applied to a term certain annuity determines the length of time that payments will be made. At the end of the guarantee period, all payments cease and the term certain annuity is completed.

For a life pay annuity, a guarantee period is an add on. A true life annuity has a 0 year guarantee period. With or without a guarantee period, a life pay annuity doesn’t have a limit on payment while you are still alive. With a 0 year guarantee period, once you die, the annuity completes with no further payments. The addition of a guarantee period to a life pay annuity means that the life insurance company is on the hook to pay during the guaranteed period of time whether you are alive or dead. Once the annuity payments exceed the guarantee period, death of the annuitant[s] triggers the end of any further payments. If death takes place within the guarantee period, the insurance company has to pay to either your estate or a named survivor the difference between payments made within the guarantee period and payments not yet received.

Usually there is a cost to adding a guarantee period to a life pay annuity. One would think that a 0 year guarantee period would produce the most income. In reality, the best income is obtained from a 5 year guarantee period for registered funds and a 7 year guarantee period for non-registered funds. When we are dealing with non-registered funds particularly, some people want to hedge their bets by purchasing a long guarantee period so there might be money left for surviving children. This can be costly but some times worth it.

So, to be clear, the length of the guarantee period specifies the length of time that payments are made for a term certain annuity but a guarantee period of any length does not affect the lifetime income payable by a life pay annuity.