1.
MEANING AND DEFINITION
Meaning
The term 'annuity' is derived from the Latin word 'annum', and as such it means annual payment of a fixed amount.
But as a matter of practice. Annuity means any periodical payment of a fixed amount made at a regular interval of
say, one year, half year, a quarters, or a month, to discharge one's obligation under a contract reckoning compound
interest at a certain rate. The person obliged to make such payments is called annuitator, the person entitled to
receive such payments is called annuitant or annuity holder, the lump sum consideration against which such
payments are granted is called presem value, and the lump sum amount which is recoverable after a certain period
against such regular payments is called the accumulated amount.
When it is desired to receive a lump sum in commutation of one's regular pensions, the annuity system is applied to
determine any required value involved in the matter.
(iii) Establishment of a Sinking Fund
A sinking fund is a fund which is created through periodical contributions of equal amount for a certain period to be
invested outside in certain guilt-edged securities with a view to realising an accumulated sum inclusive of
compound interest at a certain rate per annum to meet an expensive project like redemption of an existing debt or
replacement of an existing asset. When such a fund is established. the annuity system is applied to determine any
required value involved in the matter,
Mostu vatic & finana
6.2
ANNUITIES
(iv) Establishment of an Endowment Fund
An endowment fund is a fund which is created by setting aside a lump sum of money to grow with compound
interests for certain periods upto a desired sum that would suffice to pay for an award of prize. scholarship,
donation, grant or the like either for certain times or for ever. When such a fund is established the annuity system is
applied to determine any required value involved in the matter.
(v) Securing a Regular Income
When it is desired to secure a regular income for a certain period or till the happening of certain contingent event
viz. death, marriage, completion of education etc. or for ever, the annuity system is applied to determine any
required value involved in the matter.
(vi) curring Deposits
When it is desired to make recurring deposits with a post office, a bank or any other financial institution the annuity
system is applied to find out any required value involved in the matter.
(vii) Annuity Policy
When it is desired to purchase an annuity policy from a life insurance company the annuity system is applied to
determine the required value involved in the matter.
3. DIFFERENT TYPES OF ANNUITIES
On the ba is of continuity
(i) Annuity Certain
An annuity which is payable for a certain number of times is called annuity certain. In such a case, the values of n
(ie. the number of years) and t (i.e. the number of times the annuity is payable in a year) are mentioned in clear
terms.
(ii) Annuity Contingent
An annuity which is payable till the happening of a certain contingent event (i.e. an event which may or may not
take place within a stipulated time viz. death, marriage, completion of study etc.) is called contingent annuity. In
such a case the value of a is not given though the value of 'I might be indicated. However, for a contractual
obligation, the value of 'n' is estimated with a fair degree of accuracy, keeping in view the nature of the problem.
(iii) Annuity Perpetual
An ammuity which is payable for ever without any stop is called perpetual annuity. In such a case the value of it is
neither stipulated nor estimable, although, the value of t might be indicated. The examples of such annuities are
award of prizes, grant of aids, sanction of scholarships etc. of perpetual nature.
On the basis of payment
(iv) Ordinary Annuity or Annuity certain due immediate
An anmity, the payment of which is enforced immediately from the period of the contract without any
delay is called annuity ordinary or annuity certain chie immediate Thus, if in 2011, it is agreed to pay an
annuity of 1,500 for a certain or uncertain number of periods or for ever, t payment of the said annuity
shall start immediately from 2011. Such annuities may be payable at the end of cach period like that of a
car loan.
It may be noted that unless otherwise is specifically mentioned, an annuity ordinarily refers to annuity paid at the
end of period.
(v) Annuity due prepaid immediate
An anmity which is payable at the beginning of each period like that of insurance premium is called anmity due
prepaid immediate.
For example, payment of recurring deposits in a bank or a post office, payment of instalments of LIC of India, etc.
(vi) Annuity Deferred
An annuity, the enforcement of which is deferred or delayed for certain periods to wait upon the fulfilment of certain
conditions is called an annuity deferred. Thus, if in 2011 it is agreed to pay an annuity of 1,500 for a certain or
uncertain periods after 2 years, the payment of such annuities shall start from the year 2013. The enforcement of
such annuities are delayed till the fulfilment of certain conditions viz attainment of the age of majority of the
beneficiary accumulation of the sum to a required extent etc. However, such amounts may be payable either at the
end or at the beginning of each period depending upon the terms of the contract. For example, pension scheme of
LIC of India, etc.
