Legal Definitions - face-amount certificate of the installment type

A face-amount certificate of the installment type is a specific kind of investment contract where an investor agrees to make a series of regular payments, known as installments, over a predetermined period. In return, the company issuing the certificate promises to pay the investor a fixed, predetermined sum of money—the face amount—at a future date, or upon the certificate's maturity. It functions much like a structured savings plan with a guaranteed payout, and it is regulated as a security.

Here are some examples to illustrate this concept:

• College Savings Plan: Imagine a parent who wants to save for their child's college education. They might invest in a face-amount certificate of the installment type offered by a financial institution. They agree to pay $300 every month for 15 years. At the end of the 15-year period, the certificate matures, and the institution pays out a guaranteed $60,000. The monthly $300 payments are the installments, and the $60,000 is the fixed face amount received at the specified future date.

• Retirement Income Supplement: An individual nearing retirement might purchase this type of certificate to supplement their pension. They commit to paying $750 quarterly for 10 years. Upon the certificate's maturity, they receive a lump sum of $35,000. In this scenario, the quarterly $750 contributions are the regular installments, and the $35,000 is the guaranteed face amount they receive after the 10-year period.

• Major Purchase Savings: A couple planning to buy a new car in three years might use a face-amount certificate of the installment type as a disciplined savings method. They agree to contribute $500 every six months for three years. At the end of the three years, the certificate guarantees them a payout of $3,200. Here, the semi-annual $500 contributions represent the installments, and the $3,200 is the fixed face amount they are promised to receive at the end of the three-year term.