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Annuity plans: Useful or not?


Understanding how annuity plans work is key to investing in them at the right point of time.

India is fortunate to have a well-developed insurance space that is also constantly evolving to meet customers' expectations. There is an array of insurance products available in India today. Apart from conventional life, health, vehicle and travel insurance plans, a growing category of plans pertain to those that invest in the markets whilst providing protection to the policy holder.

This second category is seeing robust growth as more people realise the immense potential of plans that offer growth over investment as well as insurance protection. Of special interest in this context is a product known as the 'annuity plan'.

What is annuity?
Annuity plans are insurance products that are useful for those planning their retirement. It is not a plan that is to be taken after retirement. On the contrary, it is a policy that one takes while one is still young and having a stable income. It is designed such that once the person retires, he may have a steady revenue with which to pay all his expenses.

An annuity policy is also useful for those planning to retire early from their job, such as age 45 years instead of the conventional 60 years. One can use the corpus from the annuity plan to run the household expenses as one pursues a hobby, takes a sabbatical for a few months or starts one's own business.

The pay-out from the annuity plan is in terms of monthly, quarterly, six-monthly or annual frequencies.

 
The 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.
 
The absolute need for annuity plans
There are two sides to retirement – one is the peaceful, joyful side that allows the retiree the chance to finally do the things that a lack of time and opportunity prevented him from doing earlier. The second side is the grim side of retirement. It is one which sees the retiree battle daily household expenses and struggle to pay for essential medication and treatment. This retiree has not been able to plan for a stable and peaceful retirement, resulting in financial chaos. To make matters worse, he does not have an income after retirement, but his expenses still continue as before.

Annuity plans have been designed for both categories of retirees. They take care of one whether one is financially stable post-retirement or not. The corpus provided by these plans can be useful for you at a time when there is no active income but there are household responsibilities.