The value of an annuity is an actuarial tool an annuitant uses to calculate the amount of money necessary to pay you monthly payments for the foreseeable future. When you buy an annuity, an issuer invests your money into a fixed annuity to earn interest. The amount of the investment and the duration it is invested in are determined by the terms and conditions of the contract between the two parties.
Once you reach the end of your investment period, a predetermined amount will be paid for your investment plus a lump sum, which are known as the payment value. Most annuities have a fixed rate, which may be indexed over time. Usually, the interest rate is not included in the payment value but instead is accrued and accumulated over a specific period of time. As with all types of fixed returns, an investor must anticipate a set return or risk in order to make a successful investment.
If you decide to surrender your annuitant and sell your annuities, you can do so at any time, without penalty. In addition, if you choose to surrender your annuities before the maturity date, the annuitant usually has to repay the surrender amount. Because of this risk, it is best to get a good idea of the amount of money that will be received once the payment value is reached.
Once you have determined your payment value and know the period during which the amount will be made available, you can compare the value and risks of various annuities by comparing the payment values. Most annuities offer standard annuities, variable annuities, universal, and indexed annuities.
Most fixed annuities provide a fixed annuities price. However, if you have a long life expectancy, you may pay a premium for an adjustable annuity that provides a fixed annuities price and can be adjusted to suit your circumstances.
Fixed annuities usually pay a fixed rate of interest and do not vary over time. Variable annuities allow an investor to select the term of the payment and usually give an adjustable interest rate. However, if you want a fixed annuity rate but the annuitant dies before the end of the term, you would need to pay the surrender amount or sell the annuity to pay for the death benefits.
Some types of annuities, such as a universal annuity or indexed annuity, provide an income tax deferred feature, which is very beneficial to a retiree with a large estate. A large annuity will allow the retiree to take advantage of the tax deferred feature, which gives a large tax savings and allows the retiree to use the retirement assets for any purpose and at any time.
It is important for you to be aware that the annuity payments can be tax deductible, but be sure to check with your accountant or tax adviser about any tax deduction you may qualify for. You also may be able to use a qualified retirement plan.