Ordinary Annuity vs Annuity Due: A Complete Guide

Unlike ordinary annuities, annuity-due payments are unevenly spaced out and are issued immediately when a new period begins. The timing difference directly impacts the present value and future value of all annuities. Ordinary annuities are typically more costly to the investor than Due annuities for the same payment stream because of the delayed receipt of payments.

Key Differences: Ordinary Annuity vs. Due Annuity

Knowing how annuity works is also crucial for understanding your investment options and securing your financial future in a way that best suits you. If you are receiving annuity income, an annuity due is preferred because you get the money sooner. Assuming monthly payments, an annuity due puts the cash in your hands one month earlier than an ordinary annuity. You can choose between an ordinary annuity and a Due annuity with some annuities. Depending on your preferences, you can receive payments at the beginning or end of each period. Essentially, ordinary annuities and Due annuities differ in terms of the timeframe at which payments are made and when you can take them out.

Once you retire, the insurance company will then start paying you back based on your agreed terms. The purpose of this article is to discuss the difference between an ordinary annuity and an annuity due. In sum the difference between the two is that once payments start an annuity due begins at the beginning of the payment period vs. the end of the payment period for an ordinary annuity.

On the other hand, annuities due could be more beneficial for those who prioritize maximizing their annuity rates over time. For instance, if an individual seeks higher overall earnings and is comfortable with a slightly more complex payment structure, annuities due may be a preferable choice. Annuities sold by insurance companies to provide retirement income can be structured as ordinary annuities or annuities due. An ordinary annuity pays at the end of a period — so, the payment covers the period that has already passed. The period can be any designated time frame, such as a month, quarter, or year.

Pros of Ordinary Annuities

The first mortgage payment is due on the first of the month after you’ve owned the home for 30 days. That payment is in arrears, which makes the mortgage an ordinary annuity. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. Any fixed payment for a service or property before a service period begins is an example of an annuity due payment. Annuity-due payments are best for receipts, as they have a higher present value than ordinary annuities and are less exposed to inflation. Determining the best annuity with the best annuity rates hinges on aligning the specific features of each type with an individual’s financial goals and circumstances.

Ordinary annuity is ideal for mortgage payments, while annuity due is ideal for insurance premiums. With an annuity due, payments are unevenly spaced out over time, with the first payment made immediately at the start of the period. The main difference between an ordinary annuity and an annuity due is in the payment schedule.

When an annuity due is paid, the payment covers an interval after the payment is made. This leaves the annuity due to be commonly described as a payment occurring at the beginning of a period. For example, if you invest $100,000 in an ordinary annuity for 10 years at 5% interest, you will receive roughly $1,060.66 a month. In the case of a mortgage payment due at the end of the month, the homeowner could invest the money ordinary annuity vs annuity due over the weekend and potentially earn interest. The lender, however, misses out on this opportunity, which results in a lower present value.

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Though both types make payments once per period, policyholders will notice the payments occurring at different times. For instance, an ordinary annuity comes at the end of a specific period. However, an annuity due payment arrives at the beginning of a payment period rather than at the end. Understanding the differences between different types of annuities is essential when planning your financial future. To assist you in making an informed decision, the following blog post outlines the key differences, common uses, advantages, and disadvantages of ordinary annuities and annuities at Due. When planning your financial future, understanding the nuances of different annuity types can make a significant difference.

If you are retired and need income to cover an emergency medical expense, a Due annuity can immediately provide a cash flow source. Ordinary annuities are commonly used in situations like loan repayments or retirement plans. On the other hand, a Due annuity is more suitable for lease payments or rental payments that must be made immediately at the beginning of each month. Shawn is the founder of The Annuity Expert, an independent online insurance agency servicing consumers across the United States.

Deciding which annuity option is best for you depends on various factors. As you decide whether to buy an annuity, remember the following to ensure you choose what works best for you. Ordinary annuities pay at the end of each period, while Due annuities pay at the beginning of each period. Contact us today for free advice or a quote, and take the first step towards securing your financial future with confidence. Take self-paced courses to master the fundamentals of finance and connect with like-minded individuals. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.

Mutual funds give investors exposure to lots of different kinds of investments.
However, the best option is a due annuity if you ever need income immediately.
Annuities sold by insurance companies to provide retirement income can be structured as ordinary annuities or annuities due.
The present value of the ordinary annuity is computed as of one period prior to the first cash flow, and the future value is computed as of the last cash flow.

RETIREMENT

In general, ordinary annuity payment is made on a monthly, quarterly, semi-annual or annual basis. The present value of the ordinary annuity is computed as of one period prior to the first cash flow, and the future value is computed as of the last cash flow. The present value of the ordinary annuity formula considers the dollar amount of each payment, the discount rate, and the number of payments. The present value of the annuity due formula uses the same inputs but adjusts for the earlier payment timing.

In general, money received sooner is worth more because of the time value of money. Ordinary annuities typically have a higher present value for the party that makes payments, while the party that receives payments has a lower present value. At The Annuity Expert, we understand that navigating the complexities of annuities can be daunting.