Ordinary Annuity Formula and Its Application
Annuity rates are terms used to describe the way in which the amount you invest in an Annuity Fund is calculated. Present Value of your Annuity. The present value of your annuity is simply the value of future annuities, given a certain rate of return or discount point, at the time of a specific period in the future. You can calculate whether you will receive more cash today by taking an annuity payment or a structured payment now.
An Ordinary Annuity: this is the most common form of Annuity Insurance. This form of Annuity Insurance is different from an Ordinary Annuity only in that it does not pay out a regular stream of income. Instead, if you plan to retire to a younger age, your Ordinary Annuity will be converted into an Annuity with a payment equal to the earlier retirement payment plus a certain percentage of your earlier retirement deposits. If at any point during your life you decide not to continue paying this payment, your Ordinary Annuity will be terminated and you will receive a withdrawal for the greater of the face value or market value of your Ordinary Annuity and the balance of your earlier pension payments.
There are many other types of Annuities besides the Ordinary Annuity such as the indexed Annuity, the life annuity, and universal or deferred annuities. When comparing the value of these types of Annuities to an Ordinary Annuity it is important to note that although they both provide for fixed payments, they do it in different ways. For example, with an indexed annuity the future income is determined by how the value of the investments performed during the life of the annuitant has been invested. The same is true for life annuities. With a life annuity the future income is determined by the remaining lives beneficiaries, while with the former the payment of a fixed rate is used.
There are many different methods used to calculate the present values of Ordinary and Indexed Annuities. One method that is used to determine the present values of Ordinary Annuities is to use the discount factor, where you take the present value of all of the future annuity payments and divided them by the amount of principal remaining at the end of the life of the annuitant. The use of the discount factor is a way of comparing the values of Ordinary Annuities with those of delayed retirement pensions.
Another method of presenting the value of an Ordinary Annuity to calculate its present value is to use the Discounted Receivable Method. With this method, a percentage of the total value of the future payment is deducted from the present value to get the discounted value. This percentage is then multiplied by the number of years left on the annuity contract to get the discounted annuity payment. There are different methods of presenting the annuity contract for a discount rate to calculate the annuity payment; however, if you choose the discount rate method you will need to provide information to the insurance company including, how many years are left on the contract, and the type of contract you have, for example, indexed or Ordinary.
The third method used to determine the present value for Ordinary and Indexed Annuities is to apply the deferred annuity payment formula. With this method you divide the lump sum payment you receive into smaller payments during different periods of time, for example a one-year deferred annuity payment and five-year deferred annuity payment. This deferred annuity payment formula is used in retirement compensation plans and certain life insurance policies. To use these deferred annuity payment formulas you must provide information about your contract and period of time involved.