An annuity is a financial agreement entered into between a policyholder & an insurance company. The Annuity Definition in life insurance refers to an amount invested in regular payments or in a lump sum. In return, the insurance provider provides a regular flow of income to the annuitant. This payment will either start immediately (immediate annuity) or after a certain period (deferred annuity). Thus, it is a contract in which funds are invested either in instalments or in full to get a regular payout amount, either for a fixed number of years or for a lifetime. This plan works in the following manner:
Step 1: The amount saved for retirement should be invested in an annuity plan.
Step 2: Choose the time period when you desire, i.e. immediately or later.
Step 3: The amount invested will help accumulate interest till the time annuity income starts. The period during which the amount grows is called the deferment period.
Step 4: The amount accumulated is then repaid during the retirement tenure at the payment tenure as chosen by you.
Features of Annuity Plans
When we have understood the meaning of annuity, let us now understand the salient features of Annuity plans:
· This plan offers a regular income stream throughout your life at a fixed rate, thus helping to fulfil your retirement needs.
· This plan comes with a variety of options, & one can choose a plan according to one’s needs & preferences. The different plans available are:
- Single Life Annuity Plan
- Annuity with Return of Purchase Price
- Joint Life Annuity Plan
- Joint Life Annuity with Waiver of Premium
· This plan is flexible as it provides options to pay the premium amount monthly, quarterly, half-yearly, or yearly.
· This plan assures receipt of regular & guaranteed payments for a complete life tenure.
· This plan also offers flexibility in the purchase plan chosen, which means the modes available are either contributing regularly over a period of time or in a lump sum amount.
· This plan also comes with a nomination facility.
· The payout will be received on a regular basis once the plan matures, but the taxes on payouts are deferred.
· This plan does not have any fees or hidden charges.
· The annuity income is taxable as per the income tax slab under the Income Tax Act. 1961, according to the chosen old or new regime.
Steps to Buy an Annuity Plan in India
Provided are the steps to buy an annuity plan in India:
Step 1: Assess your financial needs & objectives
Assess the amount required to fulfil the future financial obligations & objectives during retirement tenure, such as health, medical expenses, lifestyle, etc.
Step 2: Choose the type of annuity
Choose a plan depending on the risk tolerance level, investment horizon, & the time when you want payouts to start.
Immediate Annuity
Under this plan, payouts are received immediately after the initial investment is made. This plan is best suited for those individuals who are close to retirement & want to receive a regular source of income. This plan includes a regular pension immediately after it is purchased, i.e. no deferred payments.
Deferred Annuity
Under this plan, the amount is invested for a fixed period of time before the payout starts. This plan is best suited for those individuals who are about to retire in the next 10-15 years. This plan also includes insurance coverage, where a portion of the sum assured is paid to the beneficiaries in case of the unfortunate demise of the policyholder.
Fixed Annuity
Under this plan, the payments are received for a pre-determined period, where if you die before the completion of the aforesaid period, the payments would be received by your nominees in that case. This means the insurance company invests the premium paid by the annuitant & releases payout either monthly or annually at a pre-decided interest rate, returns remaining unaffected by the market fluctuations.
Variable Annuity
A variable annuity plan includes the benefits of both insurance & investment, helping to build a retirement corpus. Here, the funds are invested in debt, equity, or balanced funds, providing higher returns in comparison to fixed annuities due to their being linked to the market. Hence, at the time of retirement, this plan offers a regular stream of income, & some plans also offer death benefits.
Step 3: Choose Annuity Options
Single Life or Joint Life
Once you have chosen the type of annuity plan, opt for the coverage you desire, i.e. self or along with spouse after your demise.
Return of Purchase price
One can also opt for an option to get back the initial investment amount to the beneficiaries if the annuitant dies.
Payout Frequency
Choose the time period when you want to get payments, i.e. monthly, quarterly, half-yearly, or yearly.
Step 4: Compare Plans & Insurers
Compare different plans available on the basis of rates, fees, features, claim settlement ratio, etc. To estimate the potential income, one can also make use of an Annuity Calculator.
Step 5: Complete Documentation & Purchase
Once the plan has been chosen, you can apply for the same online via the website of the insurance company or offline through a financial advisor. The following documents are supposed to be submitted along with the application:
- Identity Proof, which includes PAN card, Aadhaar card, & passport.
- Address Proof, which includes a utility bill, bank statement, etc.
- Age Proof, which includes birth certificate, 10th marksheet, passport, etc.
- Bank Details, which include a cancelled cheque.
Step 6: Receive Payments
Once the plan has been bought, & the vesting age has been reached, the payouts will be received regularly. It includes receipt of assured returns directly into the bank account according to the payment tenure chosen.
Conclusion
Individuals close to retirement & looking for stability, a diversified income, or a conservative investor looking for a secure future can consider buying an annuity plan. Once the investment has been made in the annuity plans, the funds will not be easily accessible till the time the payout phase starts. As early withdrawal will lead to the imposition of a penalty, it is important to get clarity on its terms & conditions.
