What Is An annuity?
by admin on 13/01/09 at 7:23 am
Unless you are an expert or active participant in the finance industry, you may ask the question: What is an annuity? Indeed, this term is bandied around the place, generally with an assumption that you know exactly what is being discussed. Well, let me lift the cloud hanging over your head by giving a very clear explanation. Basically, an annuity refers to a recurring financial sum paid or received regularly, for a fixed number of periods. For example, if I was to receive a payment of $250 each month for the next 12 month, that would technically be considered an annuity.
So why not just add all those payments up and give one ending sum? As with most things in the financial industry - it’s just not that easy. Factors such as the time value of money and interest rates actually have an impact on the future value of these payments. Hence, financial experts coined the term “annuity” simply to refer to the situation, and not the actual money or value changing hands.
That’s it! Not too hard was it. So now, if someone happens to ask you “what is an annuity?”, you will be able to give an intelligent answer, instead of looking confused.
