Annuities are investments that promise specific amount of benefits at specific times. It can be referenced as variable or fixed, where the insured can either receive periodic interests or a one-time huge sum of money. This value of benefits are accumulated from the capital invested plus the interest earned with that money. Certainly, both preferences have its advantages and disadvantages, and the insured must have to consider first these consequences, his age and the relative drift of interest rates before choosing an annuity.
Given the value of cash an insurance company guarantees, the client must learn the terminologies in which annuities are deeply related. Accumulated value, or sometimes known as cash value, is one of the important terms in insurance. Accumulated value refers to the total acquired value in cash value life insurance. Cash value life insurances procure cash over a particular duration. For individuals compromising into an early parenthood, this is effectively regarded as their forced savings since the accumulated value can be a type of savings plan that is attached to an immediate insurance need. Even if it will be so hard to save a little money after attending to the urgent needs of the family, young parents could still have periodic savings for financial security.
As to how it is calculated, accumulated value is the sum of the initial investment and the conceded interests. Mathematically speaking, it is the product of the Accumulation Unit Value multiplied by the Accumulation Units in a Variable Annuity. It can also be equal to the holder’s interest for a certain account funding the insurance added to the periodic interest. Same numerical solution is followed for the current market value of a mutual fund solved by multiplying the number of accumulation units to its net asset value. Differently for the fixed annuity, accumulated value is the net quantity invested plus the interest collected less any fees or previous withdrawals.
In detail, accumulated value starts to actualize when the policy holder pays a monthly premium. The actual cost of insurance, policy expenses, and other expenses included in the contract, will be deducted from the premium and what’s left would be placed in the internal account of the policy. That amount, with the compounded interest, is substantially pertained to be the accumulated value.
Borrowing a partial amount of the savings, while keeping the policy intact, is allowed in certain insurance plans. The insured must also be mindful of the current cash value he has since some insurance companies only allow borrowers having a specific range of current accumulated value. If somehow, the policy holder decides to stop the policy, he can “cash it in” for a cash value, with charges described in the statement of account.
One clashing issue though with regards to cash value is the cash surrender value. It is the sum of money being accumulated (tax deferred) within the policy’s duration and similarly, the money the owner would receive (before taxes) if the policy is cancelled. With these differences, most insurance policies have surrendered charges for 10 to 20 years reducing the total “cash value” or “accumulated value” down to becoming the cash surrender value.