What is the meaning of guarantee period?

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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 by the insurance company to you. At the end of the guarantee period, all payments cease and the term certain annuity is finished.

For a life pay annuity, a guarantee period is an add on. A true life annuity has a 0 year guarantee period. Whether or not you add a guarantee period to a life pay annuity, that guarantee period doesn’t limit payments in any way while you are still alive. Without a guarantee period, when you die, a life 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 guarantee period, 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. In most cases, there is a choice between continued payments to the end of the guarantee period or a discounted lump sum payment.

Usually there is a cost to adding a guarantee period to a life pay annuity. Usually, the longer the guarantee period, the less lifetime income one receives. One would think that a 0 year guarantee period would produce the most income. In reality, the best income is obtained with 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. The reduction in income 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 guarantee period does not affect the lifetime income payable by a life pay annuity.