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An annuity is an insurance contract between you and the insurance company and works like a pension plan. When you purchase an annuity, you deposit a certain amount of money with the insurance company. The money you deposit earns interest, which compounds. In return for your deposit, the insurance company agrees to make regular annuity payments to you for a certain period of time, or until your death, depending on which type of annuity option you choose.
Compound annuity tables provide calculations to find annuity factors. You can use the interest on an annuity and the term of the annuity to find the annuity factor.
Annuities have unique tax advantages not available with many other financial products. The tax advantages for annuities allow them to take advantage of what many financial planners call "triple compound interest." This "triple compounding" refers to how money builds up inside of an annuity and allows you to, in some cases, make more money than with similar nontax-advantaged investments.
A compound annuity is a method of distributing a large amount of money by making smaller payments over a fixed length of time. Home mortgages and insurance settlements are examples of compound annuities. If you know the present value of the annuity (the lump sum or principal), the interest rate, the length of time and number of payments, you can plug these variables into a formula to compute the value of the payments. You can also calculate the present value if you know the amount of each payment.
