What is Annuity?

What is Annuity?

An annuity is a type of pension product which provides an opportunity for long term investments. Most of these plans are available as life insurance policies from the best life insurance companies in India.

An annuity works as a safety blanket for a time when one does not have a stable income or is unemployed. These plans therefore come in handy as long- term investments and are an ideal bet as one’s retirement plans. During such time, an annuity serves as a regular income or monthly income plans. There are different kinds of annuities available based on your requirements, but the main 2 types of annuities are as below: 

1. Immediate annuity – under this type of annuity there is little time difference between the period where the policy holder makes the payments and when the policy holder receives the payout. The period when the payments are made is known as the accumulation phase and when the payouts are made is known as the disbursal phase.

One type of Immediate Annuity is a Fixed Annuity as explained below-

Fixed annuity – this is a very popular annuity type. It offers guaranteed income post retirement to anyone who opts for this particular scheme. It is a safe and conservative option that most people prefer. The payouts that one receives during this period will remain constant. This serves as one of the best investment plan for monthly income in your post- retirement years.

While some annuity plans allow withdrawal when a policy holder is diagnosed of a critical illness, some plans offer the investment amount after the demise of the policy holder to the nominee. However, money that is invested in an annuity cannot be withdrawn prematurely unless it is for special conditions.

2. Deferred annuity – this type of annuity has a significant gap between the accumulation phase and the disbursal phase. Like if one starts investing in deferred/ variable annuities when they are younger. In this case they also have the advantage of age on their side in terms of the premiums and planning. Any negative impact from a bad investment can be easily absorbed and courses and plans can be changed with the cushion of age.

Basically, Annuities offer a sense of safety. And can prove to be extremely fruitful as a long- term investment. Annuities are rather simple investment plans which one can choose based on what their goals for the investment and return are. As per the type of annuity, and the specifics of disbursal, they then receive periodic payments- either monthly, quarterly, annually or in a lumpsum.

While most annuities are looked at as long-term investments which are not that easy to break, a lot of factors determine what the annuity payout will be. So like we explained above, if you are exploring monthly income plans for your post retirement years, the most important factor you will have to consider while choosing the right annuity is the annuity tenure and what age you are at currently. Do a complete research on your investment options be it a short term investment or long-term investment, it is best to be prepared and know what to expect.

3. Variable Annuity- In a Variable Annuity Plan, the premiums you pay are invested in market-linked instruments like mutual funds or equities. The returns from the plan are directly dependent on how well these investments perform. If the underlying fund performs well, your returns will be higher; and if it performs poorly, the returns may decrease.

1. Accumulation Phase: This is the period when you start paying premiums and begin building your retirement corpus. It begins from the date of your first premium payment.

2. Vesting Phase: This marks the point when your annuity plan matures, and you start receiving regular payouts or pension benefits as per the policy terms.

Benefits of Annuity Plans

Annuity plans offer a reliable source of income after retirement, ensuring financial stability during your non-earning years. One of the key benefits is the guarantee of regular payouts, which help you manage daily expenses and maintain your lifestyle. These plans also offer tax benefits under Section 80CCC of the Income Tax Act. Annuities can be customized based on your preferences. Since they typically have no direct market exposure, they provide disciplined savings and reduce the risk of outliving your savings. Annuity plans are ideal for individuals looking for long-term financial security post-retirement with minimal market risk.

Why Should You Buy an Annuity Plan?

AN Sep 67/22