Annuity Payment Formula

Annuity insurance provides a secure source of income for retirement and financial planning. A traditional annuity provides a lump sum payment in fixed monthly payments during retirement; an individual can invest the money for further growth after retirement. The annuitant receives a fixed income stream during retirement and gets the option of increasing his/her payments if they choose so. However, the amount of increase depends on the performance of the stock market. There are two types of annuities available in the market-a term or guaranteed annuity and a variable annuity.

The present value of an annuity depends upon the rates of inflation. The present value of a term annuity refers to the amount that would be received under the terms of the annuity at the time of retiring. The present value of a guaranteed annuity refers to the total value received under the annuity agreement when the annuitant retires. The variable annuities allow the investor to adjust the payments according to the market value of the underlying shares of stock or bond annuity.

Annuity insurance provides long-term and short-term income. Long-term annuities are for earning retirement benefits; they are generally invested in a variety of assets and managed by a professional investment advisor. In short-term annuities, the annuitant receives fixed payments for a specific future time period, while a structured settlement is paid to the beneficiary in a lump sum. In case of a structured settlement, the payments are equal monthly over a definite period of time determined by the settlement agreement. These payments make it easy for recipients of annuities to plan for the future security of their future payments.

Annuity payments are made semi-annually, quarterly, half yearly, annual or monthly. While the initial premiums are tax deductible, the payments themselves are not tax exempt. Thus the account holder should take care to evaluate the present values of his investments to ascertain if the total cost of his investments in an annuity are greater than the anticipated tax-free distributions at retirement. Annuity payments are generally considered safer than saving in a bank as the probability of your account becoming insolvent are almost non-existent.

Annuity payments are normally variable, with a minimum and maximum payment amount set forth in the agreement. If the value of the annuity during the specified period is less than the stated minimum payment, more cash will be received than if the value was more than the minimum payment. Over the years, the annuitant has the option of converting his annuity into an ordinary annuity by paying a one-time fee known as a premium. Premiums are included in the income of the account and may be invested in tax-deferred accounts like a Roth. This conversion process is called estate conversion.

Another way to convert your annuity payment is to use the present value or discounted cash flow method. Here, you would determine the present value using an interest rate that ranges from your present day date to your future date. Using this information, you would determine your minimum and maximum required distributions for the rest of your life. After all, even your annuity payment formula may be changed over time.