Annuity plans: Useful or not?

  • Retirement Planning Articles


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 into it. When you make this lump sum investment into an annuity plan, the life insurance company you have chosen invests your money and pays out the returns generated from these investments back to you as payouts for when you retire. To know the amount you need to live a comfortable retirement, you can employ a retirement planning calculator. In case you are seeking out a guaranteed income for your retirement years, it's worth opting for an annuity plan without a doubt.

Hence, an annuity is a regular payout that you receive during the term of your policy. The person on whose name the annuity policy will be issued is known as an annuitant. The annuitant is supposed to pay 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. The amount of a single premium that is paid under the policy is known as the purchase price.

Types of annuity plans

There are two types of annuity plans: Immediate Annuity and Deferred Annuity.

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

'Deferred annuity' refers to a plan where the policy holder pays premiums for the policy for a number of years. The pay-out takes place once the holder retires, and may be paid in the frequencies mentioned above. This option is useful for those who would like income in periodic intervals post-retirement.

Why do you need this Plan?

Wondering if an annuity plan is worth investing in? Here are a few reasons why this plan is so helpful to you.

  • Beat 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 retirement years will continue to rise for the subsequent generations. As far as India is concerned, there currently exists no government protection for those who retire, and individuals are expected to fend for themselves once they attain senior citizenship. Hence, it has become imperative to prepare for their post-retirement life with careful planning.
  • Financial Freedom:

    As salaried individuals, we are habituated to receiving a regular income from our employers, but this privilege no longer exists in our retirement. Through its fixed income model, you can replace your salaried 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 one's preferences and lifestyle.
  • Tax Benefits1:

    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.
    1Tax Benefits are subject to changes in tax laws. Kindly consult your financial advisor for more details.
  • Added Benefits:

    Some annuity plans come with a free look period. This opinion gives the policyholder a period of 15 days from the date of the receipt of the policy document, so they can review its terms and conditions. If the policyholder does not agree with any of these terms and conditions, she has the option to cancel and withdraw from her policy while stating the reasons for her objection.

A word on the nomination:

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 death. 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 Immediate Annuity Plan is a single premium annuity plan which keeps your savings aside and gives you a regular income, so you can enjoy your retirement years. This plan also offers the option known as Joint Life Last Survivor which provides regular payouts to the second annuitant in case of the demise of the first.



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