Understanding The Different Parts Of An Annuity

An annuity is basically a set of equal monthly payments in equal scheduled time periods. Typically, the scheduled time period is one year, but sometimes the time span can be much shorter, up to 20 years. These equal monthly payments are also known as the periodic payout. When you purchase an annuity from a reputable company, you will have this payment until your death or cancellation of the annuity (whichever comes first).

When you purchase an annuity with one company, they will give you one lump sum payment that will include all equal monthly payments during the agreed upon time period. With many annuities, you will be able to choose what amount you would like your annuity to have; however, it will be based on how many equal monthly payments you would like to receive throughout the agreed upon period. Depending on whether you purchase a lifetime annuity or a term annuity you will receive payments that will be equal over the course of your life. Some people choose to use their annuities for education expenses or to purchase a home; whichever purpose you may have, you will receive the same payments.

There are two different types of annuities; direct and deferred. A deferred annuity simply pays out the future value of what the annuitant already has. They are usually a combination of tax deferred and immediate future value. They do not pay out immediate cash, but if you choose to stop receiving payments before their full maturity date then the value of the deferred annuity will be forfeited. Direct annuities follow a very similar procedure, except that instead of paying out current value, they pay out future value immediately.

The advantages of direct payments are that they are more flexible than an ordinary annuity. If you choose to stop receiving payments, for example, when you reach retirement age, you can sell your annuity due to the tax deferral to get immediate cash. If you decide to move, you can sell the payments to a qualified annuity holder who will take over the account. Selling the annuity due to the tax deferral allows you to maintain control of your account until you reach normal retirement age.

If your lump sum value is less than the value of all of the future n payments, you will receive a proration. The proration is the difference between the value of your present value and the total value of your future payments. This means that your actual payment amount will be less than the total of future payments if you don’t sell the annuity in the specified period of time. The longer you wait to sell the annuity the higher the annual return you will receive.

You should note that you do not receive the full value of your annuity-due. Some annuities have restrictions on what may be withdrawn before the maturity date. For this reason, it’s important to discuss the details with your broker. In many cases, the annuity-due is treated as the initial face value of the PV. The initial face value is then modified based on market conditions.