ANNUITY

DEFINITION
A series of payments made at successive periods (intervals) of time is
called an Annuity.
If all the payments are equal, then the annuity may be called a
Level or Uniform annuity, otherwise it may be called a variable annuity.
Classification of Annuities: (8 marks)

Annuity

Life
Annuity Certain
Annuity Annuity
depending on
other
contingencies

Immediate Annuity Deferred Deferred

Annuity Certain due Immediate Annuity
Certain Annuity Certain Certain due
i)Annuity Certain:
If the total interval for which the payments of the annuity are to be made
is a definite number of years, not depending upon any contingency, then
the annuity is called Annuity Certain.
ii)Life Annuity:
If the payments are to be made during the life of a person it is called a
Life Annuity.
iii)Immediate Annuity:
If the successive payments of the annuity are made at the end of the
successive periods, then the annuity is called an Immediate Annuity.
iv)Annuity Due:
If the successive payments are made at the beginning of each successive
period, then the annuity is called an Annuity Due.
In the case of an Immediate Annuity Certain of Rs.1 p.a. for
10 years there are 10 yearly payments in all, the first payment of 1 being
made at the end of the first year and the last at the end of the 10th year.
In the case of an Annuity certain due of Rs.1 p.a. for 10
years there are again 10 payments, but the first payment is made at the
beginning of the first year and the 10th payment is made at the beginning
of the 10th year.( ie, at the end of 9 years.)
 Immediate Annuity of Rs.1 p.a. for 10 years
Period in years
0 1 2 3 4 5 6 7 8 9 10
1 1 1 1 1 1 1 1 1 1
payments

Annuity Due of Rs.1 p.a. for 10 years

Period in years
0 1 2 3 4 5 6 7 8 9 10
1 1 1 1 1 1 1 1 1 1
payments
V)Deferred Annuity Certain:
A deferred annuity certain is an annuity certain postponed for a given
period called the deferment period.
A deferred annuity can be classified into either a
deferred immediate annuity or a deferred annuity due.
For example,
A deferred immediate annuity certain 10 years with a
deferment period of 5 years is Rs.1 in which the 1st payment is to be
made at the end of the 6th year and the 10th payment at the end of the 15th
year.
Again if it is a deferred annuity certain due for 10
years, with a deferment period of 5 years , the 1st payment is made at the
beginning of the 6th year. That is immediately at the end of deferment
period of 5 years. The 10th payment will be made at the beginning of the
15th year. ie, at the end of 14 years.
Deferred immediate annuity certain of Rs.1 p.a for 10 years with a
deferment period of 5 years
Period in years
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
1 1 1 1 1 1 1 1 1 1
payments
Deferred annuity certain due of Rs.1 p.a for 10 years with a
deferment period of 5 years
Period in years
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
1 1 1 1 1 1 1 1 1 1
payments

So the deferred immediate annuity certain for 10 years with the

deferment period 5 years is the same as a deferred annuity certain due
for 10 years with a deferment period of 6 years.