An annuity typically provides you with an income for your later life, while also providing you with guaranteed interest payments in the form of fixed income. You can buy an annuity from any number of financial institutions and purchase either a variable or fixed annuity to suit your individual needs. When investing in an annuity, you are making a promise to pay regular interest payments over a certain amount of time, determined at the time of purchase. These payments are received each month, and the entire lifetime of the annuity usually commences at the purchase date.
The present value of an annuity is simply the present value, times the total number of years it will take to earn the lump sum of money that will pay off the total amount of the annuity, at a given rate of return. The annuitant is given a lump sum of money which they use to pay off the initial loan, plus the ongoing interest charges. The annuitant can also choose to receive interest income in the form of compounded payments, or receive a single, constant, monthly payment. The higher the discount rate offered by the annuity provider, the lower the current value of the annuity. There are many different discount rates, which can be found out by contacting an annuity consultant.
Some annuities provide for variable period returns, in which case the payment values may change over the course of time. For example, if there is a loss in the stock market, the initial value of your annuity may fall, but if it rises again, your annuity payment may rise. Another feature is called first period amortization. With this feature, your annuity begins with a pre-determined amount of money, and the amount of money that you receive over time is equal to the total number of years you have paid into the annuity. Usually, this type of annuity has less costly premiums than others.
Finally, there are two additional types of annuities – minimum payment and annual payment. With a minimum payment annuity, your payment amount will change over time; for example, if you become disabled, your lump sum value may decrease. However, you receive a fixed value for the life of the annuity (the total number of years during which the contract exists). With an annual interest rate, your payment value is equal to the total number of years during which the contract exists, multiplied by a certain percentage.
Before calculating your future value with any of these methods, it is important to know how they work. Because the payments you receive are determined at the time of calculation, the actual value of your annuity will be different depending on how it will be received. For example, if you were to sell your annuity when it reached its maturity date, you would not receive the full value. This is why it is very important to contact a qualified financial advisor for advice regarding your annuity’s future value.
Although you are locked into a contract for the life of your annuity and cannot sell it before it matures, some discount rates are beginning to work around the same time. Factoring companies will begin to accept lower than market rates to obtain your payments. It is a good idea to consult a financial advisor regarding the impact of these deals on your annuity; especially if you are already retired with a substantial investment in your annuity and plan to make future payments. Before purchasing a structured settlement with these companies, it is wise to make sure you are getting the best deal possible.