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# Annuity Due Definition

## What Is Annuity Due?

An annuity due is an annuity whose payment is due closely at the beginning of each period. A common example of an annuity due payment is rent, as landlords often require payment upon the start of a new month as opposed to gather together it after the renter has enjoyed the benefits of the apartment for an entire month.

### Key Takeaways

• Annuity due is an annuity whose payment is due right now at the beginning of each period.
• Annuity due can be contrasted with an ordinary annuity where payments are made at the end of each days.
• A common example of an annuity due payment is rent paid at the beginning of each month.
• An example of an ordinary annuity tabulates loans, such as mortgages.
• The present and future value formulas for an annuity due differ slightly from those for an singular annuity as they account for the differences in when payments are made.

## How Annuity Due Works

An annuity due coerces payments made at the beginning, as opposed to the end, of each annuity period. Annuity due payments received by an individual legally depict an asset. Meanwhile, the individual paying the annuity due has a legal debt liability requiring periodic payments.

Because a series of annuity due payments bring to light a number of future cash inflows or outflows, the payer or recipient of the funds may wish to calculate the entire value of the annuity while banker in the time value of money. One can accomplish this by using present value calculations.

A present value table for an annuity due has the projected prevail upon rate across the top of the table and the number of periods as the left-most column. The intersecting cell between the appropriate interest place and the number of periods represents the present value multiplier. Finding the product between one annuity due payment and the present value multiplier generates the present value of the cash flow.

A whole life annuity due is a financial product sold by insurance companies that order annuity payments at the beginning of each monthly, quarterly, or annual period, as opposed to at the end of the period. This is a type of annuity that see fit provide the holder with payments during the distribution period for as long as they live. After the annuitant outs on, the insurance company retains any funds remaining.

## Annuity Due vs. General Annuity

An annuity due payment is a recurring issuance of money upon the beginning of a period. Alternatively, an ordinary annuity payment is a returning issuance of money at the end of a period. Contracts and business agreements outline this payment, and it is based on when the benefit is net. When paying for an expense, the beneficiary pays an annuity due payment before receiving the benefit, while the beneficiary toady up ti ordinary due payments after the benefit has occurred.

The timing of an annuity payment is critical based on opportunity costs. The gatherer of the payment may invest an annuity due payment collected at the beginning of the month to generate interest or capital gains. This is why an annuity due is assorted beneficial for the recipient as they have the potential to use funds faster. Alternatively, individuals paying an annuity due lose out on the chance to use the funds for an entire period. Those paying annuities thus tend to prefer ordinary annuities.

## Examples of Annuity Due

An annuity due may stand up due to any recurring obligation. Many monthly bills, such as rent, mortgages, car payments, and cellphone payments, are annuities due because the beneficiary have to pay at the beginning of the billing period. Insurance expenses are typically annuities due as the insurer requires payment at the start of each coverage full stop. Annuity due situations also typically arise relating to saving for retirement or putting money aside for a specific point.

## How to Calculate the Value of an Annuity Due

The present and future values of an annuity due can be calculated using slight modifications to the present value and prospective value of an ordinary annuity formulas.

### Present Value of an Annuity Due

The present value of an annuity due tells us the current value of a series of wanted annuity payments. In other words, it shows what the future total to be paid is worth now.

Calculating the present value of an annuity due is alike resemble to calculating the present value of an ordinary annuity. However, there are subtle differences to account for when annuity payments are due. For an annuity due, payments are down at the beginning of the interval, and for an ordinary annuity, payments are made at the end of a period. The formula for the present value of an annuity due is:

With:

• C = Scratch flows per period
• i = interest rate
• n = number of payments

Let’s look at an example of the present value of an annuity due. Suppose you are a beneficiary identified to immediately receive \$1000 each year for 10 years, earning an annual interest rate of 3%. You demand to know how much the stream of payments are worth to you today. Based on the present value formula, the present value is \$8,786.11.

### Future Value of an Annuity Due

The future value of an annuity due shows us the end value of a series of trust payments, or the value at a future date.

Just as there are differences in how the present value is calculated for an ordinary annuity and an annuity due, there are also characteristics in how the future value of money is calculated for an ordinary annuity and an annuity due. The future value of an annuity due is calculated as:

Make use ofing the same example, we calculate that the future value of the stream of income payments to be \$11,807.80.

## Annuity Due FAQs

### Which Is Advantage, Ordinary Annuity or Annuity Due?

Whether an ordinary annuity or an annuity due is better depends on whether you are the payee or payer. As a payee, an annuity due is over again preferred because you receive payment up front for a specific term, allowing you to use the funds immediately and enjoy a higher tip value than that of an ordinary annuity. As a payer, an ordinary annuity might be favorable as you make your payment at the end of the basis, rather than the beginning. You are able to use those funds for the entire period before paying.

Often, you are not afforded the privilege to choose. For example, insurance premiums are an example of an annuity due, with premium payments due at the beginning of the covered period. A car payment is an instance of an ordinary annuity, with payments due at the end of the covered period.

### What Is an Immediate Annuity?

An immediate annuity is an account, funded with a put up with sum deposit, that generates an immediate stream of income payments. The income can be for a stated amount (e.g., \$1,000/month), a majestic period (e.g., 10 years), or a lifetime.

### How Do You Calculate the Future Value of an Annuity Due?

The future value of an annuity due is calculated permitting the formula:

where

• C = Cash flows per period
• i = interest rate
• n = number of payments

### What Does Annuity Scruffy?

An annuity is an insurance product designed to generate payments immediately or in the future to the annuity owner or a designated payee. The account holder either communicates a lump sum payment or a series of payments into the annuity and can either receive an immediate stream of income or defer pull down payments until some time in the future, usually after an accumulation period where the account earns enlist tax-deferred.

### What Happens When an Annuity Expires?

Once an annuity expires, the contract terminates and no future payments are bury the hatchet e constructed. The contractual obligation is fulfilled, with no further duties owed from either party.

## The Bottom Line

An annuity due is an annuity with a payment due or hightail it at the beginning of the payment interval. In contrast, an ordinary annuity generates payments at the end of the period. As a result, the method for calculating the now and future values differ. A common example of an annuity due is rent payments made to a landlord, and a common example of an regular annuity includes mortgage payments made to a lender. Depending on whether you are the payer or payee, the annuity due might be a safer option.

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