Value of an Annuity
Annuities are investment products issued by insurance companies to investors. The contract can be either immediate or deferred. Annuities give an investor a tax-preferred investment vehicle while promising a specific level of income. The value of an annuity depends on the structure of the annuity and what value you may be calculating.
Other People Are Reading
-
Annuity Contract Value Terms
-
Most annuity investors are familiar with terms like owner, annuitant and beneficiary -- the parties of the annuity contract with the insurance company. There are other terms less frequently discussed such as present value, annuity due and cash value. The present value of an annuity is what the annuity is worth in current interest terms based on the series of payments made over time. The annuity due refers to the value of an annuity that has had time to accumulate and the amount of payments resulting from that growth. The cash value is the existing worth of the annuity derived from premiums and earnings in the account.
Factors Affecting Value
-
When calculating any of the value of annuity concepts, there are certain factors that come in to play. The first is the amount of money put into the account, otherwise known as a premium. The frequency of premiums affects the value. Lump-sum payments increase value with the entire principal earning interest from the onset. The interest rate also plays a role in affecting the value. The final component affecting the value of an annuity is the duration the money is held in the account.
-
Significance
-
The significance of using the three ways to compute the value of an annuity allows investors to view values as they may change over time. Because an annuity is a long-term investment, investors need to be able to understand how the annuity will grow over time based on real spending values. Of course, many of these projections are based on making assumptions with variables, keeping the constant for the duration of the projection.
Misconceptions
-
Since there are so many ways to look at the value of an annuity, investors may become confused about what they are looking at. This is especially true for investors who are new to annuities who review quarterly statements that state only actual cash value and don't factor in the projections estimated in the present value or annuity due value. If interest rates change or inflation is higher than expected, investors may have a surprise at the end of the annuity investment finding that purchasing power has declined significantly.
Considerations
-
Wise investors review the performance of annuities over the duration of the annuity contract and re-evaluate the present value or annuity due value of the annuity. An annuity agent can run comparable for you at any time prior to investing and during the course of your investment that helps you determine if your investment is on track. Evaluating is only feasible with deferred annuities in the accumulation phase of the contract. Immediate annuities can not be changed once they are started.
-
