Present Value of Deferred annuities

14/02/2020 0 By indiafreenotes

An annuity is essentially a finance related contract, which permits the person who is buying it to pay on a lump-sum basis or make payments in series, in return for acquiring disbursements at regular intervals in future. Deferred Payment Annuity is a type of an annuity in which the payments that are received start somewhere in the future instead of starting at the time it is initiated.

Deferred payment annuity generally provides tax-deferred development and growth at a variable or fixed rate of return, similar to a regular annuity. Deferred payment annuity is usually bought for under-age or small children so that the benefit payment amount can be postponed till they complete a certain or desired age. Such annuities are extremely helpful when it comes to planning for retirement.

Deferred annuities are a type of annuity contract that delays payments to the investor until the investor elects to receive them. When the investor is in savings mode, he makes payments into some sort of investment account. The investment grows and compounds in a tax-deferred manner, and the investor pays no taxes on its growth until he decides to convert the investment into an annuity and start receiving regular payments.

A deferred annuity is essentially an investment vehicle that is sold by companies that provide insurance to people. The value of a deferred annuity can typically be calculated in two different ways i.e. future based value or present based value. It is these particular values that can assist you in determining the amount you should invest in order to fulfill your investment related goals.

Deferred annuity formula is used to calculate the present value of the deferred annuity which is promised to be received after some time and it is calculated by determining the present value of the payment in the future by considering the rate of interest and period of time.

Present Value Calculation

As per this method, you need to take the present value i.e. the amount you are thinking of investing today, into consideration. Next, you will have to provide definitions for the variables. For example, if you wish to make a saving of 100,000 dollars by the time a decade comes to an end and you come across an annuity that would offer you a minimum of 5% return on an annual basis, then your present value would typically be a minimum of 61,391 dollars today.

Future Value Calculation

For this, you will have to make note of the future value, which is the amount that you would receive after the maturity of the annuity. Next, define all the variables. For example, if you are planning to make an investment of 10,000 dollars and wish to find out how your asset would grow in case you were to get a 5% rate of interest over a period of twenty years, then your investment’s future value would be 26,532 dollars.

An annuity is the series of periodic payments received by an investor on a future date and the term “deferred annuity” refers to the delayed annuity in the form of installment or lump-sum payments rather than an immediate stream of income. It is basically the present value of the future annuity payment. The formula for a deferred annuity based on an ordinary annuity (where the annuity payment is done at the end of each period) is calculated using ordinary annuity payment, the effective rate of interest, number of periods of payment and deferred periods.

Deferred Annuity = P Ordinary * [1 – (1 + r)-n] / [(1 + r)t * r]