How to Calculate Annuity Values

Annuities can be a great way to invest your money for your retirement years. However, the return on your investment will vary depending on the type of annuity you choose. So, how are you supposed to know which type of annuity to choose, and what the value of your annuity is?

That's when it may be helpful to consult an independent insurance agent. These agents are experts in the field of annuities and can answer all your questions to help find the right annuity option for you. But first, here's a bit of background on all types of annuities and their values to help you get started.

What Is an Annuity?

Annuities are policies issued by insurance companies that pay a regular, guaranteed income for life or a specified period of years. You can buy an annuity policy by making a single payment or a series of payments.

Deferred annuities: These annuities accumulate money for a period of time before the policy begins to pay income.
Immediate annuities: These annuities start paying income to the policyholder right away.
Traditional qualified annuities: These annuities are part of a traditional pension plan or IRA and are purchased with before-tax dollars.
- Tax on annuity cash value: Roth-qualified annuities are part of a Roth IRA or pension plan and are purchased with after-tax dollars. Non-qualified annuities are personally owned and paid for with after-tax dollars.

An independent insurance agent can help you choose the type of annuity that provides the best value.

Annuity payout values vary by the type of policy you have. There are plenty of free annuity value calculators available online to help you answer the question, "How much is my annuity worth?" You can also refer to our guide to understand what is the cash value of an annuity based on the type in question.

Deferred Fixed Annuity Values

Fixed deferred annuities accumulate money at a stated rate of interest. The values of a fixed annuity are guaranteed by the insurance company. The guarantees apply to:

Annuity cash value: The payments accumulated at the interest rates applied. The cash value is the total money at work.
Annuity surrender value: The cash value minus any charges for cashing in the policy. The surrender value is the money available to you.
Annuity death benefit: This is the minimum value your beneficiaries receive upon your death from the payout.

An independent insurance agent can also help you understand the difference between the cash value and surrender value of annuities.

Deferred Fixed-Indexed Annuity Values

Fixed-indexed annuities offer growth potential without the risk associated with the stock market. Index accounts credit some of the gains of a market index, like the S&P 500, and none of the losses.

The portion of gains credited is measured by a formula. The values of a fixed-indexed annuity are guaranteed by the insurance company, and as with deferred fixed annuities, the guarantees apply to:

The cash value
The surrender value
The minimum surrender value
Death benefit

Deferred Variable Annuities

Deferred variable annuities accumulate money in investments selected by the owner, referred to as subaccounts. Like mutual funds or other investments, the value of the subaccounts is based on market performance. They aren’t guaranteed.

Immediate Annuity Values

Immediate annuities and deferred annuities make regular payments to the owner during the income phase for a specified period. Some insurance companies will allow an owner or beneficiary to stop the payments in exchange for a lump sum of money. Here are some key terms to know:

Commuted value: The amount of the lump sum from an immediate annuity.
Discount rate: The present value of all the future payments at an assumed rate of interest.

Factoring companies also buy annuity payments and use the same process. The price they offer is determined by the discount rate they use. The higher the discount rate, the lower the price offered.

Present Value of an Annuity vs. Future Value of an Annuity

Understanding the current value of an annuity compared to its future value is crucial when choosing your policy.

Present annuity value

This refers to the cash value of all of your future annuity payments. Present annuity values are based on the time value of money. Investing money allows you to grow its value through interest, etc. For example, obtaining $5,000 now would be more valuable than a promised payout of $5,000 in five years.

Future annuity value

This refers to the value of a group of recurring payments at a certain future date. The higher the discount rate applied, the greater the annuity's future value will be.

Annuity present value formula

This is the basic formula for calculating the current value of an annuity:

Key:

P: The annuity's present value
PMT: The dollar amount of each annuity payment
R: The interest or discount rate
n: The number of payments left to receive from the annuity

You can also use online annuity value calculators if math isn't your strong suit. An independent insurance agent can also help you determine the current value of your annuity and the future value of your annuity.

How Annuity Value Grows

Understanding the value of an annuity over time can help you choose the right type of policy.

Fixed immediate annuities

These annuities start to pay income 30 days to one year after the purchase payment is made. The annuity rate is applied to the purchase payment to calculate the guaranteed income. Fixed immediate annuity rates are based on age, sex, and interest rates. Some insurance companies offer more competitive rates than others.

Variable immediate annuities

The income options from these are based on how the market performs. This means that in certain years, the income could be higher than in others.

The assumed rate of interest is what insurance companies use to calculate the initial variable income payments from an annuity. The initial payment is calculated based on your age, sex, the assumed rate of interest, and the purchase payment.

If the investments that you selected perform better than the assumed interest rate, your payment will be higher. If the performance of the investments you selected is lower than the assumed interest rate, your payments will be lower.

The advantage of a fixed immediate annuity is that there are no surprises. However, a potential downside is that inflation can reduce the purchasing power of a fixed annuity payment.

The advantage of a variable annuity payment is the potential for an increasing income to keep pace with inflation. However, if the value of the underlying investment decreases, so does the income.

Here's How an Independent Insurance Agent Can Help

If you're considering purchasing an annuity, it pays to shop around. But if you're looking to simplify the whole process, talk to an independent insurance agent. These agents have access to multiple insurance companies, ultimately finding you the best coverage, accessibility, and competitive pricing while working entirely for you.

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