Insurance and Annuity — Meaning, Formulas & Solved Examples
Insurance and Annuity — Concepts, Formulas & Examples
Insurance and Annuity are important concepts in financial mathematics. They are widely used in real life for calculating premiums, claims, and regular payments. This guide explains both topics with formulas, solved examples, and real-life applications.
1. What is Insurance?
Insurance is a contract where an individual (policyholder) pays a fixed amount called premium to an insurance company in exchange for financial protection against specific risks. Learn more from the Insurance Regulatory and Development Authority of India.
Important Terms in Insurance
- Sum Assured: The amount the company agrees to pay in case of loss.
- Premium: The amount paid regularly (monthly, yearly) by the policyholder.
- Policy Term: The time period for which the insurance is valid.
- Loss: The financial damage suffered by the policyholder.
Insurance Formula
Premium = (Sum Assured × Rate of Premium) / 100Solution: Premium = (20,00,000 × 0.5) / 100 = ₹10,000
2. What is Annuity?
An annuity is a series of equal payments made at regular intervals for a fixed number of years. Learn more about annuities on Investopedia.
Types of Annuities
- Immediate Annuity: Payments start right away.
- Deferred Annuity: Payments start after a certain time period.
Annuity Formulas
(a) Present Value of Annuity (PVA):
PVA = R × [1 - (1 + i)-n] / i(b) Future Value of Annuity (FVA):
FVA = R × [(1 + i)n - 1] / iSolution: PVA = 5000 × [1 – (1.06)^(-4)] / 0.06 ≈ ₹17,325
Solution: FVA = 2000 × [(1.08)^5 – 1] / 0.08 ≈ ₹11,732.50
3. Key Differences Between Insurance and Annuity
| Insurance | Annuity |
|---|---|
| Protects against a possible loss | Provides steady payments |
| Premium is paid to get protection | Payments are received regularly |
4. Related Topics
5. Real-Life Applications
- Calculating insurance premiums for property
- Finding scholarship value using annuity formulas
- Planning regular savings
FAQs on Insurance and Annuity
Q1. What is the formula for insurance premium?
Premium = (Sum Assured × Rate of Premium) / 100
Q2. How is present value of annuity calculated?
PVA = R × [1 – (1 + i)-n] / i
Q3. What is the difference between immediate and deferred annuity?
Immediate annuity starts payments right away, deferred starts after a set period.
