Annuity payments are fixed monthly payments paid by an insurance company to the individual. The payment made must be a fixed amount paid at evenly spaced intervals of time. They are fixed for paying either at the beginning or the end of the period. Annuity payments are mainly paid yearly, semi-annually, quarterly or monthly. Some of the most common examples of annuities are car payments, pension, insurance premiums and mortgages. They are mainly ordinary annuity and annuity due. Ordinary annuity refers to fixed monthly payments at the end of each interval where the rate of interest compounds similarly to the payment. In annuity due, a fixed payment occurs at the beginning of the interval. Other types of annuities are fixed, variable and equity-indexed.
Fixed annuities are defined as fixed monthly payments and are considered to be low risk investments. Variable ones are payments invested in portions. Equity-indexed ones are lump sum payments paid to the insurance company.
Purchase Structured
Many people make investments as this enables the insurance company to pay a fixed amount of cash at regular intervals to benefit the life of an annuitant. When an annuity is paid to benefit the life, he or she is applicable to pay tax that equals the amount attributable to the income generated by the principal. Special tax rules are applied to qualified employees for retirement annuity.
Annuities are calculated based upon the following formula:
Formula 1: Payment = PVoa / [(1- (1 / (1 + i)n )) / i]
(this formula is valid if you know the present value)
Where:
o PVoa = Present Value of an ordinary annuity
o i = interest per period
o n = number of periods
Formula 2: Payment = FVoa / [((1 + i)n - 1 ) / i]
(this formula is valid if you know the future payment)
Where:
o FVoa = Future Value of an ordinary annuity (payments are made at the end of each period)
o i = interest per period
o n = number of periods
Annuity Payments
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