What Is Maturity Guarantee?

Maturity guarantee is the dollar amount of a life insurance policy or segregated fund contract that is guaranteed within a specified period. However, there are typically additional fees for the protection guarantee and rules for how long the policy or investment product needs to be held to qualify.

Key Takeaways

  • Maturity guarantee is the dollar amount of a life insurance policy or segregated fund contract that is guaranteed within a specified period.
  • Maturity guarantees, also known as annuity benefits, often come with an additional premium or fee.
  • However, the investor must hold the investment for a set period to benefit from the guarantee.

Understanding Maturity Guarantees

Maturity guarantees, also known as annuity benefits, are available for an additional premium with life insurance policies or segregated funds. Segregated funds are investment products sold by life insurance companies that combine the growth potential of investment funds with insurance protection. They are individual insurance contracts that invest in one or more underlying assets, such as a mutual fund. Unlike mutual funds, segregated funds provide a guarantee to protect part of the money invested. Even if the underlying fund loses money, the contract holder is guaranteed to receive some or all of the principal investment.

However, the investor must hold the investment for a set period to benefit from the guarantee. There is also a fee for this insurance protection. If the holder cashes out before the maturity date, the guarantee won’t apply. The holder will receive the current market value of the investment, less any fees. With a workplace pension or savings plan that is administered by an insurance company, the fund options available typically are segregated funds. However, they do not carry an insurance guarantee and do not have the higher fees associated with retail segregated funds for individuals. But because they are insurance contracts, they do carry the potential for creditor protection and the avoidance of probate fees if a beneficiary is named.

Advantages of Funds with Maturity Guarantees

Depending on the contract, 75 to 100 percent of the principal investment is guaranteed if the fund is held, usually for a period of 10 years. If the fund value rises, some segregated funds also the guaranteed amount to be reset to the higher value, but this will also reset the holding period. Depending on the contract, the holder’s beneficiaries will receive 75 to 100 percent of the contributions tax-free in the event of the holder’s death. This amount is not subject to probate fees if the beneficiaries are named in the contract. Potential creditor protection is a key benefit for business owners.

Disadvantages of Funds with Maturity Guarantees

The investment is locked in the fund until the maturity date to be eligible for the guarantee. Early redemption would yield the current market value of the investment, which may be greater or less than the original investment. And, segregated funds usually have higher management expense ratios than mutual funds, which covers the cost of the insurance features. Also, penalties usually would be charged for early withdrawal or redemption.

Special Considerations

Annuity investors should note the changes to the rules surrounding annuity investments in retirement accounts. The U.S. Congress passed the SECURE Act in 2019, which made rule changes to annuities and beneficiaries of retirement plans. With the new ruling, annuities are portable, meaning a 401(k) annuity can be rolled over into another retirement plan when the account holder changes jobs. The new law also reduces legal risks for annuity providers by limiting the ability of the annuity holder to sue the provider if the provider can't make the payments.

Starting in 2020, non-spousal beneficiaries of retirement accounts must withdraw all of the inherited funds within 10 years of the account holder's death. In other words, the "stretch provision" has been eliminated. Before the ruling, IRA beneficiaries could stretch out the required minimum distributions by taking only the minimum each year, which helped to stretch out the tax burden. Investors should seek help from a financial professional to review the rule changes surrounding retirement accounts, IRA beneficiaries, and annuities.