21 ANNUITY a eras i sum of money payable periodically at ee ae 7 time unde, certain conditions. In short, a series of regular payments of 8 fixe sna, Paya le ely at equal intervals is called annuity. For example, payment of loan in . alments,insurang, instalments, LIC Premia, hire-purchase instalments, awarding scholarship, ete. ‘Annuities may be payable yearly, half-yearly, quarterly or monthly. Parties to Annuity (j) AiliGiEaHOR!E The person or company who is responsible for making payment oft ‘annuity is called Anuitator, So, if X purchases annuity from General Company, the General Insurance company will be treated as annuitator. (i) Annuitant One who is the beneficiary of the annuity or who takes annuity is called annuitant. (iii) ARIRWIEYYHOIMEF]: One who takes the annuity is called Annuity holder. Annuity holder pays a lump sum amount, which is known as consideration to the company or premium paid by the annuity holder. am Special Fields of Annuity . The followings are thé important fields where annuity system is specifically applied : » (i) Commutation of Pension. . (Gi) Repayment of Loan. (iii) Recurring Deposits. v (iv) Establishment of a Sinking Fund. v (v) Establishment of an Endowment Fund. v (vi) Annuity Policy from Life Insurance Company, © (vii) Securing Regular income for a certain period or till the happening of certain even! Chai sof an Annuity () Itis a contract between the Insurance company (called Annuitator) and the benefit") (i.e. annuitant). (ii) It is the periodic instalments of some amount, (ii) Instalments are due either in the beginning or at the end of the period. (iv) Annuity holder pays a lump sum amount to the oe (¥) The payment of annuity is made up to a c continuity of payment. (vi) It is taken for the payment of. ability i for ereatité resent Liab; i iti : pagetire fea atta lial cu in eae or it is meant for ee company. ertain period as per the contract. Ther? ® 222 ee ae Applied Mathematies-X! (volun?Annuity TYPES OF ANNUITY Annuities may be broadly classified as follows : Annuity | [5 (ji Immediate Annuity |» (ii) Annuity Due ‘> (iii) Deferred Annuity I. Annuity Certain : An annuity payable for fixed (finite or definite) number of years (or periods), either at the beginning or at the end of the period, is called an Annuity Certain. Annuity certain is again of three types : (i Immediate Annuity or Annuity Immediate (ii) Annuity Due (iii) Deferred Annuity (i) Immediate Annuity : If the payment of an annuity is made at the end of each stipulated interval of time, it is called Immediate Annuity or simple ‘Annuity’. Note : If nothing is mentioned, then the annuity is considered as immediate annuity. In case of immediate annuity, payment of first instalment begins at the end of the Ist year (or period) and the last instalment is paid at the end of the last year (say, nth year). For example, if a truck is purchased on Ist April 2020 on hire-purchase system and its payment is to be made in 10 equal instalments, then the first instalment (A,) will be paid after 1 year, that is, on 31st March, 2021 and the last instalment Aj will be paid on 31st March 2030. Thus. A As “Ap Ay Ap My Avo pate tot ete ed 25 26 27 28 29 30 2020 «2102223 8 (ii) Annuity Due + If the payment of an annuity is made at the beginning of each time period, it is called Annuity Due. So, in case of annuity due, the last instalment is paid at the beginning of the last year (or period) Thus, if in the above example, itself, it will be called annuity due. Thus Ay Ay An As Ay 7 “ + + + | pannel 2000 210228 5 ARS 2 Spe"? 29:2 30 i ‘ty 1 When the annuity payments begin only after the lapse of a o pets ed peed of time, itis called Deferred Annuity. It is also called as reversion. Therefore, if annuity is deferred uj if the first instalment is paid on the date of purchase pto f years, then it will commence at the end of 223» made at the end of ¢+ 1 years. Thus, if a 1 years and first payment will be made at the end oe | yeas, Ths if any is deferred for 5 years, then it will continue for 6 Ist 3st 31st 31st ist 3st 3Ist April March March March March March ————yyears 2020 2021 2022 2023 2024 2025 <—— Deferred period (1) ———> 11, (Annuity COREAGEREE If the payment of an annuity or the duration of annuity payments or both are subject to the happening of any event, the annuity is called Annuity Contingent or Contingent Annuity. Life Annuity is an important example of contingent annuity. II. |Perpetuity/or Perpetual Annuity’: If any annuity is to continue forever (i.e., infinite period) it is called perpetual annuity or perpetuity. For example, annuity for awarding scholarship to students, annuity for meeting annual maintenance expenses of an auditorium, ete. TERMS RELATED TO ANNUITY Amount of Annuity The sum of all instalments with interest due at the end of a given period is known as the amount of an annuity. a (i) Amount of an annuity is the total sum of the unpaid instalments together with the compound interest at the end of the given number of years or periods. (i) Amount of Annuity is also called as the Accumulated Sum of an Annuity. Present Value of an Annuity The present value of an annuity is that principal, which is placed for interest at a stipulated rate for specified period and equals to the amount of annuity for that period. In short, the present value of the amount of an annuity is the sum of money which is at present equivalent to the amount of that annuity. Instalment of Annuity or Instalment of Immediate Annuity The amount paid at each interval of time is called the instalment of annuity. Amount of Annuity Due If interest continues for one period after that last rent (je, instalment), the sum is known as the amount of an annuity due. ‘Thus, the total balance available immediately after the last rent of a series is known as the amount of ordinary annuity. “If interest continues for one more period after the last rent, the total is known as the amount of an annuity due”. Endowment A fund created by investing an amount of money fi 'y for a perpetual (or a definite peri wal (or any other periodic) scholarship or prize ete. is called penoh Peace kn case of endowment, investment can be made by a single or fixed number of payments. 224 SRE ee an Pare RR ED Applied Mathematics- XI (Volume 2)symbols in Relation to Annuity ‘The following symbols will be used in the context of annuity: A = Annuity s,orM = Amount of Immediate Annuity/Annuity PV. or Vor P = Present Value of an annuity a, = Present Value of Immediate Annuity or Annuity i = Interest on Unit sum for 1 year or period, icc., i n= Number of periods ‘Amount of Immediate Annuity or Amount of an Annuity (left Unpaid for n years) Amount of an Immediate Annuity or Annuity is the accumulated total that results from S,, series of equal deposits at regular intervals left at compound interest. Formula Amount of Immediate Annuity or Annuity or Annuity Certain Mor S, Afasat a} Proof : In case of immediate annuity, the payment of instalments are made at the end of the year (or period) and these instalments do not earn any interest during the year or period in which the first instalment is paid. Since the annuity is left unpaid for n years, the first instalment earns interest for n — 1 years, as it is due at the end of first year. Similarly, the second instalment earns interest for n — 2 years and so on. The last instalment earns no interest. Therefore, The accumulated amount of Ist instalment = A(I + i)! ‘The accumulated amount of 2nd instalment = A(1 + i)? The accumulated amount of 3rd instalment = A(I + i)" Amount of last instalment = A ~M=AQL+)"-1 +A + 2+ AC tt tA (which is a geometric progression) +A +9"! orM=A+A(1 +i) +. atartar+,. (I+i)-1 Note : When Annuities are payable half-yearly, year will be multiplied by 2 to obtain n. rterly payments, will be 4 times and in case of monthly > wea =M Similarly in case of quai payments, n will be be 12 times. So far i is concemed, i will be divided by 2, 4 and 12 respectively in case of half- yearly, quarterly and monthly payments. 225 Annuity