538 / How is the excludable portion of payments calculated under an annuity with a single life refund or period-certain guarantee?
(1) Determine the duration of the guaranteed amount (number of years necessary for the total guaranteed return to be fully paid). In the case of a period-certain life annuity, the duration of the guaranteed amount, in years, is known (e.g., 10, 15, or 20 “years certain”). To find the duration of the guaranteed amount, in years, for a cash or installment refund life annuity, divide the total guaranteed amount by the amount of one year’s annuity payments, and round the quotient to the nearest whole number of years.(2) Find the factor in Table III or VII (whichever is applicable, depending on when the investment is made in the contract) under the whole number of years (as determined above) and the age and (if applicable) the sex of the annuitant. This Table III or Table VII factor is the percentage value of the refund or period-certain guarantee.
(3) Apply the applicable Table III or Table VII percentage to the smaller of (a) the investment in the contract, or (b) the total guaranteed return under the contract. The result is the present value of the refund or period-certain guarantee.
(4) Subtract the present value of the refund or period-certain guarantee from the investment in the contract. The remainder is the adjusted investment in the contract to be used in the exclusion ratio.1
Example 3: On January 1, 2025, a husband, age 65, purchases for $21,053 an immediate installment refund annuity that pays $100 a month for life. The contract provides that in the event the husband does not live long enough to recover the full purchase price, payments will be made to his spouse until the total payments under the contract equal the purchase price. The investment in the contract is adjusted for the purpose of determining the exclusion ratio as follows:
| Unadjusted investment in the contract | $21,053 |
| Amount to be received annually | $1,200 |
| Duration of guaranteed amount ($21,053 ÷ $1,200) | 17.5 yrs. |
| Rounded to nearest whole number of years | 18 |
| Percentage value of guaranteed refund (Table VII for age 65 and 18 years) | 15% |
| Value of refund feature rounded to nearest dollar (15% of $21,053) | $3,158 |
| Adjusted investment in the contract ($21,053 – $3,158) | $17,895 |
Example 4: Assume the contract in Example 3 was purchased as a deferred annuity, the pre-July 1986 investment in the contract is $10,000, and the post-June 1986 investment in the contract is $11,053. If the annuitant elects to compute a separate exclusion percentage for the pre-July 1986 and the post-June 1986 amounts, separate computations must be performed to determine the adjusted investment in the contract. The pre-July 1986 investment in the contract and the post-June 1986 investment in the contract are adjusted for the purpose of determining the exclusion ratios in the following manner: