Harness Money

What is an annuity due?

An annuity due is a type of financial arrangement or investment that involves a series of periodic payments made at the beginning of each period instead of at the end. In an annuity due, the payment schedule starts immediately or at the beginning of the first payment period.

The key distinction between an annuity due and other types of annuities, such as ordinary annuities, lies in the timing of the payment. In an ordinary annuity, payments are made at the end of each period, while in an annuity due, payments are made at the beginning of each period.

Annuities due can be found in various financial contexts, including retirement plans, pensions, and certain types of insurance contracts. They are often used to provide a steady income stream or to accumulate funds for future use.

For example, suppose an individual purchases an annuity due that pays $1,000 per month for five years. In this case, the annuitant would receive $1,000 at the beginning of each month for a total of 60 payments over the five-year period.

The timing of payments in an annuity due can have an impact on the present value and future value of the annuity. Because the payments occur at the beginning of each period, the annuitant has the benefit of earning interest or returns on the funds for the entire period. This can result in a slightly higher present value and future value compared to an ordinary annuity with the same payment amounts and interest rates.

When evaluating or comparing annuities, it is important to consider the specific terms, payment schedules, interest rates, fees, and other factors that may vary between different annuity products. Understanding the characteristics of annuities due and their potential advantages or disadvantages can assist individuals in making informed decisions about their financial planning and investment strategies.