How Do I Figure an Annuity Rate for a Settlement?

Annuity contracts give you a way of converting a lump sum of cash into a stream of income. Depending on the terms of your settlement, that income stream might last for as long as you live or for some shorter, fixed period. You can figure out how much your annuity will pay out based on your account balance and the annuity rate. Insurance companies come up with their own annuity rates to offer when you’re settling your annuity.

Contact the Company

Each company develops its own table of rates and terms for settling annuities. They base the rates on age, gender and settlement terms. Companies tweak the rates periodically to adjust for changes in interest rates, how long clients live after starting a settlement and what other companies offer. Rates are typically put in an annual-amount-per-thousand-dollars format.

Compare Settlement Terms

You can settle an annuity in any number of ways. Most companies offer the traditional option of paying out for the remainder of your life or for a fixed amount of time. Some will also offer survivorship benefits, which would pay a reduced amount to your spouse if you die first. Others offer a guarantee that if you die within a certain amount of time after beginning a settlement that's based on your life expectancy, they will pay your beneficiary any outstanding balance. Compare the per thousand rate for different settlement terms.

Calculating Your Settlement Payment

The amount you receive for your settlement depends on the annuity rate and how frequently you take your payments. The annuity rate assumes you take the whole payment at once at the end of each year. You’ll have to apply a factor if you want those payments monthly, quarterly or semiannually. To calculate your payment, divide the balance in your annuity by 1,000. Multiply the result by the annuity rate and the payment factor. Say you have $300,000 to deposit in an annuity and the annuity rate is $125.40 per thousand; you would receive $37,620 per year in that case.

Tax Issues

Each periodic payment you receive will be partially taxable. You calculate the tax-free portion of the payment by multiplying the periodic payment by the exclusion ratio. The exclusion ratio is the portion of your anticipated return -- determined with Internal Revenue Service tables -- made up of your after-tax money. For example, if you deposited $100,000 and your anticipated return was $300,000, one-third of every payment would be tax free.