In today’s volatile times, it’s essential to secure your future. An annuity is one such means that enables you to get a future payout in regular installments, usually monthly and often throughout your life.
An annuity plan is essentially a contract with an insurance company that promises the buyer a recurring payout against a lump-sum or periodical investment.
Purpose of Annuity Plans
The purpose of annuities is to increase the retirement income of the buyer or supplement it. It enables you to have a steady stream of money post-retirement and live without any burden or financial struggles at a later stage in life.
In addition to securing your future, an annuity is also a solicited means for protecting or aiding your family during contingencies. With a good insurance annuity plan, you can ensure that your partner and dependents continue to receive periodic income even after you are gone.
Main Types of Annuity Plans
While the above lays down the broad definition and purpose of the annuity, annuity plans are segregated into different types, depending on the time of payout and their amounts.
Let’s go through the various types of annuity plans in India and what they offer:
- Immediate annuity: As the name suggests, an immediate annuity plan is where the premium is paid by the buyer in one lump sum as opposed to periodic installments. With an immediate annuity plan, an individual can receive guaranteed and instant payouts (for a limited period or lifetime) as soon as they deposit the premium with the insurance company. This type of annuity is ideal for those who are about to retire and need recurring income every month with immediate effect. There is no accumulation period in an immediate annuity, and the plan is activated immediately post the vesting phase.
- Deferred annuity: As against an immediate annuity plan, deferred annuity begins after a certain date. It consists of an accumulation phase and a vesting phase. During the accumulation phase, an individual starts building a corpus from the date of premium payment. However, the payout doesn’t start right away. It is in the vesting phase that the individual begins receiving a payout in the form of a pension. A deferred annuity can also be viewed as a pension plan where the buyer is permitted to buy out the annuity with the money accumulated as per the applicable conditions. It is ideal for those who do not require immediate payouts and can allow the accumulated money to grow to enjoy larger payments later.
- Fixed annuity: A fixed annuity plan entails a fixed initial investment based on a set interest rate and payout period. It provides an individual with a guaranteed sum of money post-retirement without any change till the end of the plan. In a fixed annuity, the buyer’s money is mainly invested in safe, fixed income instruments. The insurance company promises an unchanged payout based on the sum invested in such a manner. This type of annuity is ideal for those who are risk-averse and prefer traditional investments.
- Variable annuity: Unlike a fixed annuity, a variable annuity plan does not promise a fixed payout to the individual. The insurance company invests the initial corpus of the buyer into sub-accounts or a portfolio of mutual funds that the buyer chooses. The payouts are linked to the performance of the funds and can either vary or remain fixed throughout the life of the plan. The payment graph is uneven in a variable annuity plan, making it more suitable for investors with a risk appetite. One of the best examples of a variable annuity is the NPS, which is also market-linked and doesn’t guarantee fixed payouts, unlike other government offerings.
Other Branches of Annuity Plans
Depending on customizations offered by the insurance company, annuity plans can further be segregated into the following categories. These plans fall under one of the four types mentioned above and are differentiated based on their operating styles.
- Lump-sum annuity: While most annuity plans are designed to provide periodic payments against a lump-sum investment, this plan allows the individual to receive a lump-sum payout against it. However, a lump-sum annuity can be looked at as an alternative and is only accessible after a stipulated period. It may also be subject to various other conditions as stated by the insurance company. It is also to be noted that the complete retirement benefit may not be available to the individual as a lump-sum annuity amount.
- Life annuity: In this type of annuity plan, the individual receives annuity payments either monthly, quarterly, or yearly till he or she is alive. The annuity payout ceases on the death of the buyer.
- Life annuity with return of purchase price: This annuity plan guarantees annuity payouts to the buyer throughout his/her life. After his/her death, the initial amount paid to purchase the annuity is handed over to his nominee.
- Annuity payable for a pre-decided term: This type of annuity is only payable for a guaranteed period, i.e., 5 years, 10 years, or more. The payouts are made throughout the designated term, even if the buyer dies. The payments cease on the completion of the pre-decided term.
- Indexed annuity: In the case of an indexed annuity plan, the annuity payout increases by 2 to 5 % each year to incorporate inflation. Although it is not linked to the actual inflation rate, it enables the buyer to cover an increase in expenses by some margin.
- Joint life survivor annuity: This type of annuity covers you and your spouse. The payouts continue till either you or your spouse are alive. If both of you die, the annuity plan may entitle the nominee to receive the purchase price, i.e., the initial amount invested by you to buy the annuity.
Although the purpose of all types of annuities is more or less the same, their mode of operation differs to a certain extent. While a fixed annuity is more suited for conservative investors, a variable annuity is ideal for those with a risk appetite. Similarly, an immediate annuity is ideal for those on the verge of retirement, whereas a deferred annuity is suitable for investors who can allow their money to sit in their accounts for longer. Regardless of the type of plan, an annuity is a tested means of investment and a great way to secure one’s financial future.
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