Decoding Annuity Plans

  • Retirement Planning Articles

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Introduction

There are many products in the Indian financial market today that make retirement planning easier. Typically, these products all have a long-term outlook and aim to either help you build a sizable corpus by the time you retire, or to help you set up a steady stream of income for your post-retirement life.

An annuity plan belongs to the second category. It is an ideal financial product for anyone seeking to strengthen their financial security post-retirement, without the hassle of taking on too much investment risk.

What is an annuity plan?

As its name suggests, an annuity policy is one in which you receive a regular payment for the rest of your life once you make a lump sum investment. When you make this lump sum investment in an annuity plan, the life insurance company you have chosen invests your money. Then, the company pays out the returns generated from these investments back to you as payouts when you retire.

The term 'annuity' refers to the regular payout that you receive during the term of your policy. The person in whose name the annuity policy is issued is known as the 'annuitant.' The annuitant is responsible for paying the premiums toward their policy. These can be monthly, quarterly, half-yearly, or yearly premiums, depending upon the option selected based on the convenience of the policyholder. Alternatively, there are also single premium annuity plans. The amount of a single premium that is paid under the policy is known as the purchase price.

If you are looking for guaranteed income during your retirement years, it's worth opting for an annuity plan without a doubt. To know the amount you need to live a comfortable retirement, you can use a retirement planning calculator. You can also make use of an annuity plan calculator to get a better idea of the pension you will receive from your chosen annuity plan.

Why should you invest in an annuity plan?

Your retirement is a phase of life that you are no doubt looking forward to. It is when you will finally have the time to pursue your own interests, chase the goals that you have been putting off and perhaps spend some time on the things that matter to you. To lead this phase of life in a relaxed manner, what you need most is financial security.

That is why you should invest in an annuity plan. It gives you the safety of consistent long-term income payouts, which can replace your primary income easily. With the financial backing that an annuity plan offers, you can not only pursue your post-retirement goals, but you can also maintain your standard of living without compromising on your lifestyle.

Types of annuity plans

There are two types of annuity plans that you can choose from:

  • Immediate Annuity

  • Deferred Annuity

'Immediate annuity' refers to a policy where the holder receives the payouts right after the premium is paid. This kind of annuity is useful for those who are on the cusp of retirement and for those who can invest a large sum of money in the plan. The investment earns returns from the interest payable on it.

'Deferred annuity' refers to a plan where the policyholder pays premiums for the policy for a specified number of years. The payouts begin once the policyholder retires, and they may be paid on a monthly, quarterly, semi-annual or annual basis. This option is useful for those who would like to receive income in periodic intervals post-retirement.

How does an annuity plan work?

To understand how an annuity plan works, we'll need to take a look at a couple of examples pertaining to the different types of annuity plans. This is because although the central idea is the same, the manner in which the different types of annuity plans work varies.

  • How an immediate annuity plan works

    In an immediate annuity plan, you need to pay a lump sum amount when you purchase the policy. For example, say a 65-year old person intends to buy an immediate annuity plan. The initial cost of the plan is Rs. 3 lakhs. Once the policyholder has purchased the plan, the annuity payouts start right away.

    Since the policyholder has opted for monthly payouts, he receives Rs. 2,000 each month right from the time of purchase. Now, let us say he passes away at the age of 75. These payouts continue consistently till his demise.

  • How a deferred annuity plan works

    A deferred annuity plan has an accumulation period. The annuity payouts start only after this period ends. For instance, say a 45-year old person purchases a deferred annuity plan and pays a monthly premium for a period of 10 years, up until he is 55 years of age. Then, as per the terms of the policy, the annuity payouts are deferred for a specified period, say 5 years.

    This means that the first annuity payment will be made 5 years after the end of the premium payment term. By this time, the policyholder will be 60 years of age - right about they time of retirement.

Benefits of annuity plan

Wondering if an annuity plan is worth investing in? Here are some of the top benefits of an annuity plan.

A hedge against inflation and lifestyle costs:

The costs of rising are living, without objection. Medical inflation alone occurs at a rate of 14% to 15% each year. To add to this, life expectancy is also increasing, meaning that the duration of post-retirement life will continue to rise for the subsequent generations. Hence, it has become imperative to prepare for their post-retirement life with careful planning.

Financial freedom:

During your working years, you may be used to receiving a steady stream of income. However, this privilege no longer exists after you have retired. Through the assured income from annuity plans, you can replace your primary income with your annuity income once you retire. Hence, with an annuity plan, you can have the same, if not more, financial freedom throughout your life.

Flexibility:

The payout mode for an annuity plan can be customized to one's needs. For instance, if you wish to receive your income more than once a year, you can select a quarterly or half-yearly annuity payout mode. On the other hand, if you only wish to receive a lump sum payment once a year, you can select the yearly payout mode for your annuity plan. Hence, these plans can be customized to best suit your preferences and lifestyle.

Tax benefits*:

As per current tax laws, a lump sum amount that is paid towards any immediate annuity plan becomes eligible for tax deductions under Section 80CCC of the Income Tax Act, 1961.

*Tax benefits are subject to changes in tax laws. Kindly consult your financial advisor for more details.

Added benefits:

Some annuity plans also come with a free look period. This option gives the policyholder a period of 15 days from the date of the receipt of the policy document, so they can review the terms and conditions. If the policyholder does not agree with any of these terms and conditions, they have the option to cancel/surrender the policy without any penalty.

Conclusion

Annuity plans can also behave like life insurance. In case the policyholder of an annuity plan is also the life assured under that plan, this person is supposed to nominate a person(s) under Section 39 of the Insurance Act. This nominee will receive the policy's benefits in the event of the life assured's demise. The caveat to this is that the unfortunate demise of the policyholder needs to occur at any point during the tenure of the policy for the nominee(s) to avail of the policy's benefits.

For instance, Aditya Birla Sun Life Insurance Guaranteed Annuity Plus is a single premium annuity plan that keeps your savings aside and gives you a regular income, so you can enjoy your retirement years. This plan also offers the Joint Life option which provides regular payouts to the second annuitant (which can be your spouse) in case of the demise of the first.

Read next: I already have a term plan, do I need a retirement plan?

A term insurance plan is the most affordable kind of life insurance. But is it enough? Or do you need a retirement plan to help you take care of your long-term financial goals? After all, a retirement plan comes with its own set of benefits. To know more about this, you can check out our blog on this subject.

Read it here

WANT TO ENJOY THE BENEFIT OF ADDITIONAL INCOME EVEN BEFORE YOU RETIRE?

With the ABSLI Assured Income Plus, you can enjoy the advantage of additional income over the long term. By investing for a short period, you get to take home income benefits for as long as 20, 25 or even 30 years.

This extra income can help you meet the rising costs of living, make it easier to pay off debts and even ensure that you meet your life goals sooner than planned. And that's not all. In addition to the income benefit, this plan also offers you a life cover with guaranteed1 benefits and loyalty additions!

Know More

1 Provided all due premiums are paid
ABSLI Assured Income Plus (UIN: 109N127V05) is a non-linked non-participating individual life insurance savings plan.
ABSLI Guaranteed Annuity Plus (UIN: 109N132V01)
This is a Non-Linked, Non-Participating, Single Premium General Annuity Plan
ADV/3/21-22/2440

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ABSLI Empower Pension- SP Plan

A single premium plan that ensures you enjoy a much deserved comfortable retirement. UIN: 109L094V02

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A single premium plan that provides guaranteed regular income for lifetime UIN: 109N130V01

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ABSLI Guaranteed Annuity Plus

This plan guaranteed income for life which enables you to enjoy a dream retirement life. (UIN: 109N132V02)

  • Guaranteed Lifelong income with a choice of multiple annuity options
  • Deferred Annuity option to build regular income stream for future with deferment period upto 15 years
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