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Most financial planning is done by the average Indian citizen with a similar end goal—to have enough money to live comfortably post-retirement. However, the fear of outliving their savings leads to people making smarter financial decisions and that is where Tata AIA Life Insurance's Smart Annuity Plan(UIN-110N150V05) comes into the picture.
In its essence, an annuity plan is a contract between an individual and a financial institution where the individual will eventually receive a fixed stream of income in exchange for either a lump sum or a series of payments invested by the insurer earlier on.
Depending on a person's financial goals, one may prefer going for either Immediate Annuities or Deferred Annuities. The only difference between the two plans is that the former involves a single lump-sum payment designed to guarantee1 monthly payouts immediately or within a year after purchase. In contrast, the latter design allows the principal to accumulate before paying out at a specified point of time in the future. Immediate annuities are for supplementing one's retirement plan.
Depending on an individual's long-term goals, one could go for three different types of insurance annuities. These vary in terms of interest rates, the amount of risk, and eventual reward.
Fixed Annuities are the most straightforward forms of annuity plans available where the interest rate is preset and the payout never fluctuates as stipulated in the contract. These are traditionally low-risk as they are independent of the performance of other investments or stocks.
Variable Annuities are riskier as the principal paid is allocated to an investment portfolio.
The third is Fixed-Index Annuity or Indexed Annuity, where the fund depends on the financial market's performance. These plans are moderately risky but won't sink beyond a set amount. They may act as a middle ground for the above two.
Upon choosing a type of annuity plan, an individual can make two types of payments—either a single lump-sum payment or a certain pre-decided amount at regular intervals of time. A part of the principal amount is repaid at regular intervals (Annually, Half Yearly, Quarterly, or Monthly) for a specified period or throughout the individual's life.
The annuity income varies depending on the annuity plan an individual has opted for and is also based on the fund's investments. A variable annuity can give the investor a higher income than the other two types, but it also carries the maximum risk.
Although complex to understand, an annuity plan is very advantageous:
Source of Income for Life: This may be one of the most significant benefits of a retirement annuity plan. Unless an investor has sizable investments elsewhere, most annuity plans offer a lifetime payout that will last much beyond an individual's lifetime. Hence, the amount paid out by the annuity plan alleviates the lack of a regular monthly income.
Save on Taxes*: The Income-tax Act, 1961 allows certain exemptions on taxes for investments and policies. These exemptions have a maximum benefit limit per annum.
Predictable Income: Fixed Annuities, in particular, offer a more guaranteed1 source of income compared to other investment devices such as stocks or mutual funds. Even though the interest rates are lower than alternate sources, they are predictable. This advantage is beneficial for investors with lower risk tolerance.
Protection of the principle: Another benefit of fixed annuities is that the money received by the investor will always be more or equal to the principal amount invested by them.
Like any investment, along with the advantages, come certain disadvantages of an annuity that have to be considered.
High Fees: If not bought directly from the insurer, commissions may cost the investor a considerable amount of money. Annuity plans tend to come with a very high purchase cost, which makes research before purchase very important.
Surrender Fees: Surrender fees typically apply for the first 6 – 8 years of the contract. Leaving the agreement early on can result in hefty fees. Investors usually tend to back out of the contract due to the lack of liquidity.
Tough to Analyze: One of the primary rules of investing is never to invest in a product that you, the investor, don't understand. Different types of annuities—fixed, variable, or index all come with various limitations and fees and different levels of risk, making choosing an annuity plan complex for most individuals.
Lower Rate of Return: Since payments come with a fixed interest rate, they are usually less than the returns from other investment devices. Although, the risk associated with retirement annuities is much less in comparison.
While annuities are a safer form of investment for retail investors looking towards making a retirement plan, they are like any investment device because it requires ample research, consideration, and planning.
Therefore, having worked hard for so long to accumulate enough wealth to live a "golden-age life," you deserve to travel the world and devote your time to pursuing your other crafts. Hence, plan for your golden years by letting Tata AIA Life Insurance Company Ltd do all the work for you while you live your life. Make the payment(s) to Tata AIA as the investment for all your retirement plans and dreams.
How does a retirement annuity plan work?
What are the benefits of a retirement annuity?
What are the downsides of annuities?
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The products are underwritten by Tata AIA Life Insurance Company Ltd.
The plans are not a guaranteed issuance plan, and it will be subject to Company’s underwriting and acceptance.
For more details on risk factors, terms and conditions please read sales brochure carefully before concluding a sale.
This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.
*Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.
1Guaranteed Returns/Payouts depend on Plan Option, Policy Term, Premium Payment Term and Age at entry