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Annuity Calculator - Your Investment Return Calculation Guide

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Dealing with ever-changing life situations can be a pretty handful at times. However, if you remain financially prepared for unexpected situations like a medical emergency or sudden unemployment, you can be relaxed about the future to some extent. 

To remain ready for any unanticipated situations, it is recommended that you invest in an annuity plan, which is an investment plan that enables you to create a retirement corpus.  However, calculating the annuity payout can be a tedious process as several factors have to be considered while estimating the amount. This is where an annuity calculator comes into the scene. 

This article will shed some light on what an annuity calculator is, how to calculate an annuity payout, and the factors to consider when calculating an annuity payout. 

Before this, let’s first understand more about annuity plans and their types. 

What is an Annuity?

An annuity plan is a type of investment plan wherein you invest a portion of your funds with an insurance provider upon purchasing a plan. The insurance provider, in return, provides you with a certain amount as a return on investment. The returns are earned by investing a part of the premium into return-guaranteeing investment ventures. A remarkable benefit of such plans is that you have the freedom to select the type of investment venture from the options available with the provider. 

Working of an Annuity Plan

Here are a few steps that can help you understand how an annuity plan works -

  • At first, you would be required to select an annuity plan from the available ones and decide on the frequency of the premium. You can make a lump-sum payment or scheduled premium payments for the selected annuity plan.
  • When selecting an annuity plan, select the type of annuity payout that you prefer as well. These could be life income annuity, joint annuity or life annuity with a return on the purchase. 
  • Based on the plan you have bought, the portion will be further reinvested into the investment ventures available with your insurance provider 
  • The return on investment will be added to the principal investment amount. The sum earned will be categorised into monthly, quarterly, or annual payouts.  

What are the Different Types of Annuities?

Described below are the different types of annuities available in the UAE -

  • Immediate Annuity - This type of annuity plan provides you with monthly returns instantly after you make your investment, meaning that there is no waiting or lock-in duration with this plan. This type of plan is suitable if you are nearing retirement and cannot lock in your funds for long. 
  • Deferred Annuity - A deferred annuity plan, unlike the previous one, would be ideal for you if you have a long road to retirement. This type of annuity plan requires you to lock in your funds for a certain duration. The deferred annuity plans have a pre-decided lock-in period and you cannot withdraw the funds during this time. 

This investment plan has two parts -

  1. The Accumulation Phase - It refers to the time when you create your investment corpus by paying regular premiums
  2. The Vesting Period - The vesting period refers to the time when you start earning the returns on your investment
  • Fixed Annuity - This type of annuity plan ensures a fixed amount in payouts for the entire duration of payouts. The fixed annuity plans are suitable for those who want to earn a regular income post-retirement without having any risk for their investments.
  • Variable Annuity - These are high-risk annuity plans that offer higher returns on investment. Here, the premium paid is invested into multiple high-return-yielding investment options. The worth of this annuity plan depends on the performance of the investment ventures.
  • Periodic Annuity - With this type of annuity plan, you can arrange the payout at different intervals (generally at an interval of 5, 10, and 15 years). In case of an unfortunate event during the vesting period, your beneficiary or dependent will receive the payout in your place. 
  • Equity-indexed Annuity - This type of annuity plan is highly dependent on the market performance to generate returns. The money that you invest is reinvested into different investment ventures, most of which are based on the equity index.  

What is an Annuity Calculator?

An annuity calculator is an online tool that you can use to calculate the payout of an annuity plan during the accumulation period. All you need to do is provide information about how long you want to receive the payouts, when you plan on starting the payout, residence, intervals between the payouts, and the principal you plan on investing. 

An annuity calculator provides you with an estimated payout as per your investment capacity, investment period, choice of payout mode, and more. 

How to Calculate Annuity Using Annuity Calculator?

With the help of an annuity calculator, you can estimate the following -

  • The payout that would exhaust the fund in a set number of years
  • The amount required to generate a specific payout
  • The duration of investment that will generate payouts with specified returns

Other information that you can estimate using an annuity calculator is -

  • Total retirement amount
  • Additional savings required 
  • The future value of the available savings 

The following information must be provided for calculating the annuity payout -

  • Present Value of the annuity due
  • Rate of interest per annum
  • Current value of the ordinary annuity
  • The number of annuity payouts to be received.

Factors Determining Your Annuity Payout

You should take note of these factors when calculating annuity payout using an annuity calculator -

  • Details of Income - It is one of the major factors that you need to consider while calculating your annuity using your annuity calculator. You must provide information about the source of income which includes annual income, rate of growth of income, and more. All these details can help you determine the income growth you can expect in the near future and how much investment you should make to create a corpus for the future.
  • Details Related to the Demography - This includes information about your current age, the expected retirement age, and more. These details help in determining the duration of the accumulation period. The earlier you start making the investment, the longer the funds remain invested and the higher the returns. With this, you can have great returns owing to the power of compounding.
  • Inflation Rate - The inflation rate has a direct impact on the annuity payout calculation using the annuity calculator. The effect of the inflation rate can be estimated in two ways -
    • The expense would increase with time
    • The returns would appear to be less valuable when habitual to inflation
  • Expected Return Rate - Based on the type of investment plan, the return rate could be fixed or variable. A fixed rate implies that a constant and ensured return will be provided to you. On the other hand, variable rate means that there is a market-linked return option wherein the returns would be based on the fund’s market performance.

To Conclude

An annuity calculator is an automated online tool that enables you to get an estimate of the annuity payout that you would receive in the vesting period. With the help of an annuity calculator, you can also figure out whether you need to make any additional savings or estimate the future value of your current savings. 

You can calculate your annuity payout using the customised Annuity Calculator on Policybazaar Insurance. Moreover, you can purchase the best annuity plans from Policybazaar Insurance. We have an assorted list of the best annuity plans from the leading providers in the UAE that can help you earn attractive returns. 

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