Finding the future value of the annuity is an important part of getting your head around how annuities work. There are lots of ways to calculate annuity future value and this article will discuss the different approaches. In order to put money in a savings account, you need to take out a loan before depositing the money. The same concept applies when you plan on investing in an annuity.
To calculate the future value of an annuity, you need to calculate the present value of this annuity. The future value of an annuity is the total amount you will receive after the annuity has matured. This is where the annuity future value calculator comes in! As the name suggests, this helpful tool is designed to help you find the future value of an annuity or a stream of payments (like payments to buy a car, or payments towards a mortgage).
When it comes to equal cash flows, the annuity future value calculator can help estimate the value of a series in the future. This compact tool allows you to evaluate how much periodic payments will be worth after a particular amount of time. Aside from that, it can be used to determine the interest rates, annuity payments, or periods for the given values.
In this article, you can find out more about the future value of the annuity and learn how it is calculated and used. You can also get insight into different types of annuities as well as their advantages and disadvantages. We will also review our calculator that can aid you in computing the future value of the annuity. OK, let’s dig a bit deeper.
Annuity Definition – What Is an Annuity?
First of all, you need to have a good understanding of annuity before calculating its present or future value. So, what is it?
An annuity is a financial instrument that provides a series of payments over a fixed period of time. For example, an individual may purchase an annuity contract that pays out $100,000 over 20 years. This financial product provides income over a long period of time. It can be in the form of a pension, retirement plan, or life insurance.
An annuity is also known as an endowment insurance policy. It pays out a fixed sum of money each year to the insured person or beneficiary. The payments are made at regular intervals, such as monthly or quarterly. This type of investment is intended to provide an income for life, or for a set period of time.
Actually, an annuity can be thought of as an investment where the investor purchases the contract and makes periodic payments to the insurer in order to build up the cash value. The cash value is then used to provide income for retirement or other needs.
Annuities are often used to provide retirement income or as an alternative to traditional pensions. An annuity can be structured in many different ways, but they all have the same objective: to make periodic payments that will last for your lifetime, or until you reach a certain age.
Types of Annuities
There are many different methods of classifying annuities. Chances are you’ve heard of a life annuity. A life annuity is an annuity that pays out a fixed amount of money for the rest of the person’s life. The payments are made at regular intervals, typically monthly or quarterly. The insurance company calculates the value of the annuity and pays it to the person or their beneficiaries in installments over time.
It is a contract between an individual and an insurance company whereby they pay premiums to provide coverage in exchange for periodic payments at least equal to the value of their lifetime income. The person may choose a single period or joint-and-survivor annuity, meaning that if one spouse dies before both have died, the other will continue receiving payments until he/she dies as well.
Besides, we can classify annuities based on the payment variability. Variable annuities let us accumulate our payments before making tax-deferred investments. On the other hand, fixed annuities feature constant payments.
However, when it comes to the annuity future value calculator, the timing of payments is used to differentiate annuities. Thus, there are 2 sorts of annuities:
- Deferred annuity (also referred to as ordinary annuity) – At the end of each period, you are supposed to make payments. Some typical ordinary annuities include student loans, car loans, and mortgages.
- Annuity due – At the start of each month or period, it is required to make payments. This includes life insurance premiums, rental lease payments, lottery payoffs, etc.
How to Calculate Annuity Future Value
When calculating annuity future value, you may need the following parameters and terms, depending on the method used:
- Interest rate (R) – You need to express the rate of interest as a percentage.
- Payment amount – It’s the amount (cash flow) you need to pay in or out for every period.
- Payment frequency – It tells how frequently you should materialize the payments.
- Type of annuity – It is meant to signify the payment timing during your payment period.
- The number of periods – This metric indicates the annuity term expressed in years.
- Present value of the annuity – It is the current value of payments (cash flows).
- Future value of the annuity – It shows home much you will need to pay at a future date.
Now that you’re familiar with these parameters and terms, it is time to see how to calculate annuity future value. We recommend that you use the basic formula below:
AFV = P * ((1 + R) ^ N – 1) / R)
Example
- Present Value: 1,000
- Rate of Interest: 3.00%
- No. of Periods: 4
If we apply the formula mentioned above, we will get that the Annuity Future Value (AFV) is $50,931.21 in our example. Alternatively, you can use our calculator when calculating annuity future value. It is an amazing tool that can save you a lot of time and effort. Try it out!