What are Annuity Insurance and How Does it Work? An annuity is an agreement (typically a structured settlement) between an insurance company and a retiree whereby the insurer promises to pay a specified amount of money in return for periodic payments. Payment values are determined when the annuitant retires. When the person reaches a certain age and quits holding office, the settlement is settled and the premiums are paid.
An annuity usually includes a variable number of years with terms which are determined at the time of agreement. The annuitant is usually not required to make monthly or lump sum payments during the agreed period. Payments are made when the insured has reached his/her retirement age. The present value of a structured settlement is the amount of money that could be received if the policyholder should die during the agreed period from a predetermined event. The higher the discount rates, the lesser the value of the annuity
What is the Present Value of An Annuity? The present value is the amount of future cash payments that would be received if the annuitant were to die immediately after the annuity policy had matured. The value does not include the premiums paid during the lifetime of the policy or any interest that would accrue on these premiums. When considering the present value, it is necessary to compare the present value to a current annuity premium. Premiums and interest rates for these types of policies are variable and can change over time.
An Annuity Calculator can be used to determine the present value. With the use of a calculator, one can enter in information about the total value of the annuity based on information about the initial rate of interest, duration of the annuity agreement, annual taxes, life expectancy, whether the annuitant lives permanently or terminally, and whether the annuitant is not under a life insurance contract. Using these parameters, the calculator can determine the present value. Using this formula for the present value can determine whether the present value should be raised or reduced when computing the cost of an annuity payment. If the present value is greater than the premiums paid over time, then the annuitant should pay more.
Once a decision is made on the amount to be paid, then the question of how much of a payment is worth is a bit trickier. Some people unknowingly believe that their payments scheduled will automatically continue until they reach the agreed upon amount. However, this is not always the case. Using the Federal Trade Commission’s Guide to Annuity Pricing as a guide, potential annuitants can find out how much of a payment they would likely be receiving based on their stated income, life expectancy, and other factors.
This information allows an individual to determine if the annuitant’s payments are worth the initial payment, interest accrued, and additional fees. The Federal Trade Commission’s Guide to Annuity Pricing explains that if a person is paying off their initial lump sum in installments and their current lifestyle is more comfortable, then it might be best to consider a lesser payment plan. But if a person is still struggling to make ends meet and their payments have yet to reach the total annuity payout, then a payment that is greater than the periodic payments may be the best option. Using the present value formula can help annuitants find out how much of their monthly payment is actually worth.