Calculating Different Types of Annuities

An annuity is a series of payment that has to be received or made in regular intervals within a specific period of time. The most common intervals for the payment of annuities are monthly, quarterly, semi-annually and annually. Annuities would include insurance premiums, rent, mortgage, and pension fund payments.

There are different formulas used for the computation of annuities based on the type. There are three types of annuities: the fixed rate annuities, the variable rate annuities and the equity indexed annuity.

The fixed rate annuity is the most popular type of annuity in the market. If you have a fixed rate annuity, you may pay the lump sum or pay in increments over specific intervals, as the insurance company assures you that you interest rate will remain the same over the payment term of the investment. In addition to the fixed interest rate, the investors are also guaranteed fixed payment amounts (such as $500 per month for an insurance with a payment term of 20 years).

With variable annuities, you may choose the vehicles by which your lump sum payment may be invested by you insurance company. You may choose from stocks, bonds, or mutual funds as the investment vehicles. The rate of return for these annuities is not fixed and is determined by the rate of return of your chosen investment vehicles.

For the equity-indexed annuity, the computation of the rate of return is based on the equity index. One of the common indexes used for the computation of the equity-indexed annuity is the S&P 500 Composite Stock Price Index.