25/08/2022 |
Ever since its inception, an annuity plan has been a popular saving and investment mode for all types of investors, especially ones planning for their retirement. This is primarily because an annuity plan pays a specific sum over a period in return for the lump sum investment. Annuities can help generate a reliable income stream during retirement when you essentially have no active source of income to sustain your living expenses. However, if you want an annuity to start generating returns immediately, you can choose an immediate annuity, one of the most preferred types of annuities.
But given the different types of annuities available in the market today, choosing one can be a slightly daunting task. How would you know if the investment you make today will be worthwhile in the future or not? One of the ways to ascertain if a particular annuity plan is worth your investment is by understanding the PVIFA of the annuity plan.
Here is everything you need to know about PVIFA and how to use a PVIFA calculator to make an informed investment decision:
What is PVIFA?
The full form of PVIFA is the Present Value Interest Factor of Annuity. The PVIFA enables you to know the value of your investment in the future. The idea of PVIFA relates to the foundational concept of the time value of money. This means that a particular sum is of more value today than a time in the future. The primary reason is money received today can generate interest through investments. All the potentially earned money increase the value of money in the present. The PVIFA helps to know the present value of a series of future annuities.
Different types of annuity plans give you an option to choose how you want to take your regular payments. In an immediate annuity, the returns begin as soon as your make the investment. However, in a deferred annuity plan, you can delay receiving the amount for a time in the future. So, you get the option to decide whether you want a considerable sum of money or regular payments spread over a few years from now.
The future value of an insurance annuity plan is different from the same amount of money today. Hence, you need to use a PVIFA calculator to determine if a particular annuity plan is worth the investment and if you should accept the full payment today or opt for distributed payments over a period in the future.
What is a PVIFA calculator?
PVIFA is an online tool that helps you understand the prospective value of an annuity plan and the gains associated with it. There are multiple PVIFA calculators available online for free use. You can use a PVIFA calculator to decide if you want to save in a particular insurance annuity plan and whether you want the payments from your annuity plan in the present or delayed into a time in the future.
The PVIFA calculator simplifies the annuity calculations, enabling you to clearly understand the estimated growth of a particular insurance annuity plan. You do not have to make any complex calculations, and the tool automatically determines the resultant growth rate. However, you will need to provide basic information about your annuity plan, such as the return rate, period of investment, type of annuity, etc.
PVFA calculators help you effectively choose the right type of annuity plan.
How to calculate the value of an annuity plan with the help of the PVIFA calculator?
The PVIFA calculator uses a pre-determined formula for ascertaining the PVIFA. The formula is:
PVIFA = (1- (1+ r) ^-n) /r
In this,
PVIFA = Present Value Interest Factor of Annuity
r= rate of interest per period expressed as a decimal
n= total number of periods.
Understand the functioning of the formula with the help of an example:
You want to save ₹3,00,000 in an insurance annuity plan. You have annuity plans from two companies – X and Y. Company X advertises that you will get one annuity each year distributed over eight payments at an interest of 4%. However, Company Y promises that you will get ten payments at an interest of 4%.
In this, you can use the PVIFA calculator to determine the value of both annuity plans.
For Company X annuity plan
n=8
r= 0.04
PVIFA = (1-(1+0.04) ^-8)0.04
The PVIFA in this case = 6.733
For Company Y annuity plan
n=10
r=0.04
PVIFA = (1-(1+0.04) ^-10)0.04
The PVIFA in this case = 8.111
When you have PVIFA of both insurance annuity plans, multiply the growth rate with your initial investment amount of ₹3,00,000.
For Company X
₹3,00,000 * 6.733 = ₹20,19,900. This means that an initial investment of Rs. 3,00,000 in an insurance annuity plan from Company X will pay you ₹20,19,900 over 8 years.
So, every rupee that you invest in Company X will give you a return of 6.733 in the future.
For Company Y
₹3,00,000 *8.111 = ₹24,33,300. This means that an initial investment of Rs. 3,00,000 in an insurance annuity plan from Company Y will pay you ₹24,33,300 over 10 years.
So, every rupee that you invest in Company Y will give you a return of 8.111 in the future.
As per this comparison, the annuity plan from Company Y appears more profitable. However, there is a catch of the time. Your annuity plan payments are stretched for additional two years compared to the annuity plan from Company X. Even though both annuity plans provide the same level of interest, time makes the difference in the total returns of the insurance annuity plan.
When choosing your annuity plan, keep in mind your financial constraints for the future. Also, consider the rate of inflation when assessing the worth of annuity investment.
Summing Up
Overall, there are several benefits of using a PVIFA calculator. You can get precise calculations for annuity payments that you will receive in the present or the future. The PVIFA calculator can assess all types of annuity plans.
Sources:
- https://www.omnicalculator.com/finance/pvifa
- https://www.investopedia.com/terms/p/pvifa.asp
- https://www.policybazaar.com/life-insurance/pension-plans/articles/pvifa-formula-table-and-calculator/
- https://studyfinance.com/present-value-interest-factor-of-annuity/
- https://efinancemanagement.com/calculator/pvifa
- https://learningsessions.in/how-to-calculate-pvif-and-pvifa-on-simple-calculator-in-10-seconds/
- https://www.policybazaar.com/life-insurance/pension-plans/articles/pvifa-calculator/
L&C/Advt/2022/Aug/1933