A closer look at valuation
What are valuation and valuation periods?
Valuation is a calculation usually done by appraisers after an intraday or business hours to know the value of a product, hence the name valuation period. At the end of a given time, there is an identification of the value of something for investment purposes. We can encounter the valuation period in annuities and life insurances, and we can determine the value through either the present formula or the future formula. This article will explain the valuation period and its details further.
Life insurances, annuities, and valuation periods
People are now starting to recognize life insurances. They have policies that offer security and assistance in times of hospitalization and even death.
Aside from present investments, people are also looking at future investments, especially when they retire. People make sure that they will still have a source of income even when they can't work anymore.
Variable annuities offer payouts that depend on how much is the annuity investment. The value contract also depends on the status of the investments. Variable annuity investors can customize their investment's distribution whether it is a percentage or amounts to the investment components.
There is also a type of annuity called a deferred annuity. The insurance company will regularly provide the investor money or a lump sum in the future, specifically on retirement. It is a less risky investment compared to a variable annuity because there is no daily valuation. However, the advantage of variable annuities is the potential for higher payouts.
In these topics, we can always encounter the term valuation period.
Valuation using the present value
An annuity's present value is the total cash amount of future annuity payments. Then there is the ROR or rate of return, which is also known as the discount rate -it is the basis of future payments. The higher the discount rate is, the lower is the annuity's present value.
What is the basis of an annuity's present value? It is the time value of money. For example, Christine receives money amounting to $6,000 today then invests it, the value will be more significant instead of that $6,000 in the future. It means that the return rate of $6,000 will be more if invested now than receiving $1,000 per year even if invested at the same rate of interest.
Valuation using the future value
On the other hand of present value is the future value. It is the potential cash amount that an investor can achieve after using future payments. The calculation is a measurement of the set of fixed payments with interest at a specified date in the future. When we calculate the future value of an annuity, this is the total of all the payments during the time frame and its corresponding accumulated interest.
To come up with the total
sum, list down all the payments made, individual payment
periods, and each payment's accumulated interest. Hence, the requirement to
know the future value of an annuity is to calculate each cash flow in a certain
period.
