When you purchase an annuity, it is like purchasing a monthly pension. Annuities guarantee an income stream to you even after you are no longer alive. The annuitant receives the lump sum payment in full at the settlement time and you will receive the monthly payments until the annuity provider dies or the life insurance provider takes over. The reason you are receiving these payments is that the interest earned on the money is tax deferred until distribution. This makes these payments very attractive and many people are rushing to buy annuities because of this incentive.

The present value of an annuity will be the amount of future payments received at a stated rate, or discount rate, whichever is applicable. The higher the discount, or Lifetime, the rate, the less your annuity will be worth. Using a present value annuity calculation can help you determine if you will receive more cash now by taking a lump sum or by continuing to receive payments over multiple years. If you are unsure of what the future returns will be, you can use a life insurance calculator or a retirement calculator to calculate how much your monthly payments will be when you reach the end of your projected life.

There are different methods of determining the future cash flows of your annuity. They include: Assumptions, computation, and life table methods. Each method will use different variables to produce your results. You should choose which one produces the most accurate outcome so you can make an informed decision regarding your annuity purchase.

Assumptions are used when there is not time to conduct a series of analyses. The present value for the entire lifetime of the annuity would be the most accurate way to calculate the value. In this calculation, the amount of payments received over the lifetime of the annuity is compared to the expected end date of the annuity to arrive at the value.

Computation methods include the amortization schedule, the lifetime income method, and the compound interest method. These methods are based on assumptions and so may not accurately represent future cash flows one period after another. A lifetime annuity calculator can also help you understand how changes in payments affect the value over time. However, it may not be enough to forecast future cash flows because the payments cannot be known with certainty in any one period.

Life tables are based on constant rates of interest and do not vary much from their initial value. This method produces results similar to the previous example, but it accounts for the fact that the value of annuities will fluctuate over time. The compounded interest method uses the accumulated value to predict future payments. It uses this information to show a path that shows how the amount of payments will change over time. Both of these methods assume that the annuitant will continue to receive regular income throughout the lifetime of the annuity, but it is important to remember that the life table assumes that the annuitant will live longer than the annuity’s value does.