Present Value of Annuity Payments
The amount of money that you will receive in your annuity depends upon the amount of premiums paid and the life expectancy of the annuitant. The term ‘present value’ is defined as the amount of money that would be received if you were to invest the annuity in an annuity today. The present value of any annuity can never exceed the premiums that are invested. The amount of money that accumulates in your annuity grows according to the initial rate of return plus a certain percentage compounded annually. The life expectancy of the annuitant varies depending on the type of annuity that you choose to purchase and how long before the annuitant would begin receiving payments.
When people buy annuities they generally choose either a fixed annuity where the payments are fixed for the entire lifetime of the annuitant or a indexed annuity that allows for increases in value with inflation. The main benefit of a fixed annuity is that you are not required to pay premiums until the annuitant passes away, while the indexed annuity allows for flexibility with respect to the amount of payments and the date of payment. There are also lottery payments in which the interest accrued by the winning number is used to repay the loan that was made. The most common type of annuity is a semi-annual renewable annuity in which payments are made semi-annually, on a first-come-first-served basis, up to a maximum amount determined by the plan.
A non-recourse annuity allows the owner to invest without any risk of losing money. However, there are limitations. If the owner dies during the annuity period, the death proceeds from the non-recourse annuity will be paid only if the death occurs within the specified period. The owner may also choose to convert their annuity into a variable annuity at any time. If the owner does not convert the annuity during its lifetime, then the remaining portion of the interest will be paid to the beneficiary or another qualified account. If there is a refundable component, then the amounts paid to the beneficiary will be made directly from the funds received from the refunded premiums.
An annuity calculator determines the present values of an annuity by using the discount rates as well as other factors. Using a discount rate is a mathematical method that determines the present values of an annuity by comparing it to other investments and the rates of returns. The annuity calculator can also be used to compare the present value with the investment plan’s tax-deferred component. This method of presenting the present value is different from the retail price index that presents the prices of similar items in various locations throughout the country. The discount rate uses current interest rates in order to determine the present value.
The discount rate determines the amount of time that you will spend making payments before your annuity starts to pay diminishing amounts. The present value calculation uses a lump sum amount as the basis of your annuity payments. You must divide the lump sum by the number of years that your annuity will last in order to arrive at the present value.
Lump Sums are usually the only basis for the calculation of discount rates, although some contracts may use average interest rates over various periods. Most contracts have variable-rate portions over fixed-rate periods. Fixed-rate portions have a guaranteed minimum interest rate over certain periods. Some contracts also include portions with a guaranteed minimum period over a non-guaranteed minimum period.