Annuities are plans that offer a steady stream of income over time. Usually, the amount received each month is enough to cover all of your necessary expenses. However, some people prefer to accumulate an income stream through an annuity so that when they stop working, they will still have a source of income. In order to understand how this type of investment works, you first need to know what an annuity is and what it is not. It is important to understand these differences before proceeding with any investment decisions related to your annuity policy.

Annuity payments are basically payments received on a monthly or yearly basis. In other words, a person receives a fixed amount of money each month that remains unchanged until the person either dies or remarries. The payments themselves are not interest rates, as most insurance companies treat them as “interest-only” accounts. Instead, they are interested only times intervals, which represents the amount of time it takes for the principal to be replaced with a variable rate (in many cases, a portion of the principle). The annuitant assumes risk at the beginning of the annuity period, since there is no guarantee when he or she will begin receiving payments again, but because the interest rates are guaranteed, there is no reason to worry.

When you purchase an annuity plan, you are basically paying taxes on the lump sum value you received; however, if you take a fixed annuity payment from the plan and wait a long time before retiring, then you are not really receiving fixed payments, but guaranteed interest rates that remain unchanged unless the government decides to change them. Many people prefer this arrangement, since it allows them to maintain a monthly cash flow while living on a set amount of income. Once the annuitant retires, the lump sum may be returned, but the payments will be very small, perhaps nowhere near the size of what they were in the early years.

The best way to look at the way the present value of money is determined is to think of it on the same scale as a savings account. With a savings account, the present values are updated once a week with all of the information regarding interest rates and inflation. With an annuity it is imperative that the present values are updated on a constant, month-to-month basis. The reason for this is that annuities pay out over a long period of time, and their values will be influenced greatly by the economy. This can easily be determined by using a calculator online for either fixed or variable annuity payment rates.

Some people choose to pay in lump sums right from the start, and others allow the value to accrue. However, there is no real option to buy low or sell high during the time that the money is in place. The best way to address this issue is to allow the end date of the settlement to determine the final amount that is paid. When the life annuities are paid out, it should equal the total of all fixed payments. It is then a simple matter to figure out what the monthly cost will be, and it is possible to adjust the cost for inflation if one desires.

The value of a settlement should never be underestimated and should always be based on a percentage of the face value, as opposed to the average present value provided by an insurance company. The reason for this is that the annuitant may not need all of the end payments, especially if the settlement has been set up for a lifetime. Many companies offer lump sum settlements that do not need any additional payments. These are called universal endowment contracts. However, a future payment may be required by some companies, especially those that are involved in different fields and will benefit from a higher interest rate over time.