Annuity: An Annuity As a Variable Plan

Annuity is an investment contract in which a certain amount of money is made payable on a regular basis, to a certain beneficiary. The beneficiary in this contract usually depends on the terms and conditions of the agreement. The investor in this contract usually expects regular income, interest, and payment on a deferred basis. This contract is usually secured with the equity in the business. The annuitant receives regular payment in the form of cash, interest income, or a combination of these two.

Annuity usually have fixed payments that increase over a period of time. When you buy annuity you expect that the value will increase over a period of time. The present value of a particular annuity depends on various factors like the Discounted Cash Flow, Accrued Interest, Term Life, Accumulated Earnings, and expected returns. The present value of annuity represents how much money would need to be paid in the future to maintain a given series of annuity payment. The reason why the value decreases over time is because of inflation, death of principal, and time intervals.

Annuity payment structure depends on many financial decisions. One of them is choosing the term of the annuity payment. The longer the duration, the more the investor can defer payments and receive the additional amount. On the other hand, shorter terms would mean lower payments but bigger lump sum. When choosing the terms for the annuity plan, investors should carefully consider their goals and objectives.

Another factor that affects the annuity plan is the internal rate of return. It is called internal rate of return because it is the rate which the investors will earn from the interest accumulated within the plan. The internal rate of returns varies with the type of annuity payment a person chooses. For example, a lump-sum distribution provides higher internal rate of returns than fixed annuities.

On the other hand, variable annuities give higher cash flows if rates of interest are variable. Most people opt for variable cash flows in order to meet their long-term financial goals. While fixed payments may be appropriate for some cases, investors may not have the option of changing their investment parameters.

Before purchasing an annuity plan, it is necessary to take into account the present values and the expected end date of payments. Present value refers to when the actual money invested is equal to, or more than, the amount expected to be invested at the end of the plan. End date is when the actual money or the end value received is equal to, or more than, the amount expected to be paid out at the end of the plan. A well-planned retirement plan can provide consistent monthly incomes over the years. However, a well-planned retirement plan requires careful evaluation and a good decision-making process.