Valuation Period

Key takeaways

• The valuation period is the point in time when the value of a variable investment (such as a variable annuity or certain life insurance policies) is determined—often at the close of a business day.
• Valuation uses present-value and future-value concepts to convert between cash flows today and cash flows at different times.
• Variable annuities fluctuate with underlying investments and are valued daily; they offer greater upside and more risk than fixed annuities.
• Annuity timing matters: an annuity due pays at the beginning of each period; an ordinary annuity pays at the end.

What is a valuation period?

A valuation period is the specific moment or interval when an investment’s value is calculated. For many variable products (variable annuities, some life insurance policies), contracts are marked to market at the end of each business day so the contract value reflects the current market value of the underlying assets.

Where it applies

• Variable annuities and variable life insurance: owners select investment options and allocations; the contract value rises or falls with asset performance.
• Any product whose payout or account balance depends on market prices typically uses regular valuation periods to determine balances, fees, and payout amounts.

Variable annuities: risk and behavior

Variable annuities let owners choose investment subaccounts. Because balances track the market value of those subaccounts:
* Potential for higher returns and larger payouts exists, but
* Daily valuation means greater volatility and risk compared with fixed or deferred annuities.

Valuation: present value and future value

Valuation relies on the time value of money—money today is worth more than the same amount in the future because of earning potential.

Present value (PV)
* PV converts future cash flows to today’s dollars by discounting them at a chosen rate (discount rate).
* Higher discount rates reduce PV. PV is used to evaluate how much future payments are worth today.

Future value (FV)
* FV projects how much periodic investments or cash flows will accumulate to at a future date, given an interest rate.
* For annuities, FV is calculated by compounding each cash flow forward to the target date and summing them.

Both PV and FV calculations account for interest rates and inflation assumptions and are essential when pricing, comparing, or valuing annuities and other cash-flow instruments.

Example (conceptual)

When valuing an annuity during a valuation period, an analyst may:
* Discount expected future payments to determine today’s contract value (PV), or
* Compound periodic investments to estimate accumulated wealth at a future date (FV).
Interest rate assumptions and inflation expectations materially affect both results.

Annuity due vs. ordinary annuity

• Annuity due: payments occur at the beginning of each period (e.g., rent due at the start of a month).
• Ordinary annuity: payments occur at the end of each period.
  Because recipients of an annuity due receive funds earlier each period, the annuity due is generally more valuable than an otherwise identical ordinary annuity.

Valuing a corporation vs. an annuity

Corporate valuation differs from annuity valuation: it requires assessing tangible and intangible assets, liabilities, revenues, cash-flow projections, growth prospects, market position, and potential liquidity events. Methods include discounted cash flow (DCF), comparable company analysis, and asset-based approaches—far broader than simply discounting a set stream of payments.

Annuity period vs. accumulation period

• Accumulation period: the phase when an investor pays into an annuity and capital builds.
• Annuity (payout) period: when the annuity begins making regular payments to the investor. Valuation methods differ depending on which period is being analyzed.

Bottom line

The valuation period determines when contract values are set and is central to pricing and managing products with market-linked balances. Understanding present-value and future-value concepts, payment timing (annuity due vs ordinary), and the broader context of what’s being valued (cash flows vs. a whole company) is essential for interpreting valuations and making informed decisions.