551 / How is the value of a refund or period-certain guarantee determined under a variable annuity contract?
If a variable annuity settlement provides a refund or period-certain guarantee, then when calculating the exclusion ratio the investment in the contract must be reduced by the value of the guarantee.1 The value of such a guarantee in connection with a single life annuity is determined as follows:
Find the refund percentage factor in Table III or Table VII (whichever is applicable, depending on the date the investment in the contract was made) under the age and (if applicable) sex of the annuitant and the number of years in the guaranteed period. Where the settlement provides that proceeds from a given number of units will be paid for a period-certain and life thereafter, the number of years in the guaranteed period is clear (e.g., 10, 15, 20 “years certain”).
If the settlement specifies a guaranteed amount, however, divide this guaranteed amount by an amount determined by placing payments received during the first taxable year (to the extent that such payments reduce the guaranteed amount) on an annual basis. Thus, if monthly payments begin in August, the total amount received in the first taxable year is divided by five, then multiplied by 12.