What is a 'Valuation Period'

The valuation period is the time period at the end of a given period of time during which value is determined for variable investment options. Valuation is the calculation of a product’s value and is typically done by appraisers at the end of each business day.

BREAKING DOWN 'Valuation Period'

The valuation period applies to investment products like variable annuities and certain life insurance policies.

Annuities are financial products that offer investors a source of income during retirement. Variable annuities are annuity products that provide payouts and are variable dependent on the value of the annuity's investments. The contract value of a variable annuity will depend on the performance of these investments. The owner of the annuity can choose their investment products and designate percentages or whole dollar amounts toward the various investment vehicles. A variable annuity offers the potential for greater earnings and larger payouts, but because of the day to day valuation, variable annuities involve more risk than other kinds of annuities, such as fixed deferred annuities.

Calculating Present and Future Values 

In thinking about valuation, it’s helpful to understand the process. When it comes to valuation and annuities, there are present and future value formulas.

The present value of an annuity is today’s value of future payments from an annuity, when factoring in a specified rate of return or discount rate. The annuity's future cash flows are cut at the discount rate. The higher the discount rate, the lower the present value of the annuity. 

This calculation relies on the concept of the time value of money, which says that a dollar now is worth more than a dollar earned later. This concept means that receiving money today is worth more than receiving the same amount money in the future because the money today can be invested at a given rate of return. For example, receiving a lump sum of $10,000 today is worth more than getting $1,000 per year for 10 years. The lump sum, if invested today, is going to be worth more at the end of the decade than incremental investments of $1,000 each. This is true even if invested at the same rate of interest.

Knowing the the future value (FV) of an ordinary annuity formula is useful when an investor knows how much they can invest per period for a certain time period and wants to find out how much they will have in the future. FV is also useful knowledge when making payments on a loan: it helps to calculate the total cost of the loan. Calculating the future value of the annuity requires calculating the future value of each cash flow over a period of time. Annuities have a number of cash flows. The future value calculation requires taking the value of each cash flow, factoring in the original investment and interest rate, and adding these values together to determine the accumulated future value.

  1. Annuity

    An annuity is a financial product that pays out a fixed stream ...
  2. Whole Life Annuity

    A Whole Life Annuity is a financial product sold by insurance ...
  3. Annuity Due

    Annuity due is an annuity with payment due immediately at the ...
  4. Qualifying Annuity

    A Qualifying Annuity is similar to any other annuity except it ...
  5. Annuity Table

    An annuity table is a tool for determining the present value ...
  6. Annuity in Advance

    Annuity in advance refers to an amount of money that is regularly ...
Related Articles
  1. Retirement

    Present and Future Value of Annuities

    Do you want to invest in annuities that get you a series of payments over a period of time. Here's everything you need to account for when calculating the present and future value of annuities.
  2. Retirement

    How a Variable Annuity Works After Retirement

    These investments can provide extra income after you retire. Here’s a guide to when and how you will receive the payout.
  3. Retirement

    Who Benefits From Retirement Annuities

    Annuities guarantee some degree of fixed income in retirement. But is the security worth the fees and less favorable tax treatment? How to decide.
  4. Investing

    Does an Annuity Make More Money Than Direct Investing?

    Whether an annuity or direct investing makes more financial sense depends on many factors.
  5. Investing

    Should You Buy an Annuity?

    There are both pros and cons of buying an annuity, so do your due diligence before investing in one.
  6. Retirement

    5 Mistakes to Avoid When Shopping for Annuities

    Annuities give retirees guaranteed income but they aren't all created equal.
  7. Retirement

    Taking The Bite Out Of Annuity Losses

    If this investment product has caused you sleepless nights, it's time to consider alternatives.
  8. Financial Advisor

    Annuities: A Good Option in Turbulent Times?

    Annuities can be an enticing option as Americans near retirement, but there are several reasons to be wary of them.
  9. Financial Advisor

    Annuities: The Good, Bad and the Ugly

    Annuities suffer from a few perception problems. This primer that covers the good, the bad and the ugly of annuities.
  10. Retirement

    Annuities Vs. Bonds: Which One Is Better For You?

    Compare the important features of annuities and bonds, and understand which investment vehicle is the better choice based on retirement goals.
Trading Center