annuiteete

Annuiteetti is a financial arrangement that provides a sequence of equal payments at regular intervals over a defined period or for the lifetime of the recipient. Payments can be made to a purchaser, or paid out to a beneficiary, and the arrangement is common in retirement income, life insurance contracts, and loan amortization schedules.

There are several forms. An ordinary annuity features payments at the end of each period; an annuity due features payments at the beginning of each period. Fixed-term annuities pay for a set number of periods, while life annuities continue for the recipient’s lifetime. Some versions are indexed or escalated to keep pace with inflation.

Valuation and mechanics: The value of an annuity depends on the time value of money. The present value of an ordinary annuity with payment P, periodic rate i, and n payments is P times [1 − (1 + i)^(-n)] / i. The future value is P times [(1 + i)^n − 1] / i. For an annuity due, multiply the ordinary annuity value by (1 + i). In loan contexts, each payment covers interest on the outstanding balance and reduces principal according to an amortization schedule.

Uses and considerations: Annuities provide predictable income and help manage longevity or cash-flow risk. They may offer tax advantages or guarantees, but fixed payments may lag behind inflation unless indexed, and there is credit risk if the issuer can default; liquidity is limited since access to principal is restricted in most products.

See also: annuity, pension, life annuity, inflation-indexed annuity, loan amortization.