Annuity insurance offers a guaranteed interest income for retired persons and/or those with other retirement income plans. A contract that allows investors to sell their annuities to a third party defines the annuity itself. The buyer of the annuity pays a fee to the seller. This payment structure, however, also takes into account the amount of risk involved in purchasing the annuity.
The present value at purchase is the amount of money that would be required to buy an annuity at the time it was purchased (given a given rate of return), or the amount of money that would be available to make future annuity payments if the person holding the annuity were to die. The lower the discount rate, the more money the seller will pay to the buyer. Investors who purchase annuities are rewarded for their investments in the annuity by getting a monthly, quarterly, half year or yearly income stream. Investors should take into account the current discount rates offered by many life insurance companies when determining how much of their payment value they will receive upon death.
Many people are unfamiliar with the concept of investing in annuities, which makes calculating present values a bit difficult. Most ordinary annuities feature fixed interest rates and are designed to pay out a set amount over a specific period of time. However, they can be modified by adding or removing terms. When calculating the amount of your annuity payment you should add or subtract the rate of interest on your loan to the original face value, and then divide the difference between the two by the number of years you plan to cover the loan with interest.
The final component of your annuity payment is the surrender value, which is the final amount of your loan that will be returned to you. This number is figured by subtracting the surrender value from the original face value, if the amount still exceeds the life expectancy of the insured. Your surrender value is limited to the interest accumulated on your loan plus the initial loan balance and can never go higher than your investment rate multiplied by your present life expectancy. Because surrendering the entire annuity does not increase its value, it is important to pay attention to this last component.
A qualified annuity can be used as collateral for loans, mortgages and other types of collateral. The retirement value and surrender value are only two factors that can affect the final cost of your annuity; however, the other factors, interest rates and premiums, are much more important. When comparing investments, compare not just the final PV amount, but also the other components that can affect your return such as investment rates, market values at the end of the term, and the amount of fees included with the annuity contract. It is essential that you choose the right annuity for your investment strategy, because different annuities have different risk/reward balances.
To determine the value of your annuity, you must know how long you plan to live. The longer you are planning to retire, the higher your guaranteed income will be and the more you will need to service the loan in order to keep the account working. In addition, a financial product with guaranteed payments is considered less risky than one that is not guaranteed. Lastly, it is important to understand that if you are unable to pay your annuity on a regular basis, then the value will immediately begin to decrease.