Ch. 1: What is Single Premium Annuity Plan: Everything You Need To Know

Imagine you’re currently in your 40s and receive a handsome amount of money as proceeds from the sale of a property. The amount is around, say, Rs. 50 Lakhs. You plan to retire in the next 10-15 years, and hence, decide to invest the money in a safe and secure instrument for your retirement.

Now, when you search online, you come across multiple retirement schemes where you can invest this lump sum amount - and get regular payouts when you retire. One such plan option is the Single-Premium Annuity Plan.

In this article, let’s take a look at how this plan works, the benefits it offers, the customisation options available under it, and more.

Let’s dive right in!

A Single-Premium Annuity Plan, as the name implies, is a type of life insurance plan where you need to make a single, lump sum investment. Then, when you retire, the insurer will pay a steady stream of income to you for a specific period that could extend to your entire lifetime.

• As we read above, a Single-Premium Annuity Plan requires you to make a single premium payment.
  You can invest the retirement benefits you receive from your employer or the proceedings you receive from investments made in financial instruments, like ULIPs, Mutual Funds, etc. in these plans.
• At the time of purchasing the plan, the insurance company will lock in an interest rate or annuity rate.
  This annuity rate depends on several aspects, like age, the payout period, the type of plan you choose, etc. It will remain fixed and can be different for different insurance companies.
• The money you invest (excluding taxes) is converted into an annuity, i.e. a steady stream of income as per the annuity rate.
  This income or annuity will be calculated at the time of buying the annuity plan itself. And, as per IRDAI guidelines, the annuity you’ll receive every year cannot be less than Rs. 12000.
• You’ll start receiving this annuity one year after you pay the premium.
• You’ll keep receiving the annuity for the duration chosen by you while buying the plan. You can choose to receive the annuity for life or for a set period of time - known as the ‘payout period’ or ‘vesting period’.
• The annuity payouts will be made on the basis of the frequency chosen by you at the time of purchase - like monthly, quarterly, annually, etc.

Example:
Gaurav, a 54-year-old musician, plans to retire at 55. He decides to invest in a Single-Premium Annuity Plan in July 2020 to secure his post-retirement life financially.

Let’s assume he invests a lump sum amount of Rs. 2 Crore (after tax) in the plan - and the annuity rate under the plan is 6%. He opts to receive the annuity payout for a period of 25 years after he retires. So, he’ll start receiving the annuity payout from July 2021 - and it will be paid to him till July 2045.

The annuity payable under Gaurav’s policy every year after he retires will be calculated as -

Annuity Payable = Total Premium Paid (excluding taxes) X Annuity Rate
= (20,000,000) X 6%
= Rs. 12,00,000 per annum.

So, from July 2021 onwards, Gaurav will start receiving an annuity of Rs. 12 Lakhs annually for 25 years.

Yes, you can customise this plan to fit your requirements. Here are a few customisation options available -

Customising the premium amount

In Single-Premium Annuity Plans, the premium amount you’re required to pay can be decided in two ways -

• You can choose the amount you want to invest and the insurer will calculate the annuity amount as per the prevailing annuity rate.
  For instance, Akshay, 40, plans to retire at the age of 60. He decides to invest Rs. 1 Crore in a Single-Premium Annuity Plan. So, based on this and the prevailing annuity rate, the insurer will decide the annuity that will be payable to him.
• You can choose the annuity amount you want to receive in your retirement years - and the insurer will calculate the premium as per the prevailing annuity rate.
  Aman is planning to retire next year when he turns 55. He tells the insurer that he wants to receive Rs. 1 Lakh every year after he retires for as long as he lives. In this case, based on the annuity he wants to receive and the annuity rate, the insurer will calculate the premium Aman will need to pay.

Customising the retirement date

Next, you can customise from when you want to start receiving the annuity payouts under the plan.

• If you want to start receiving the payout immediately after you make the premium payment, you can choose to invest in an Immediate Annuity Plan.
  
  For example, Akshu, 54, plans to retire next year and wants guaranteed income as soon as he retires. He invests a lump sum amount of Rs. 50 Lakhs (after tax) in a Single-Premium Annuity Plan. In this case, the insurer will start paying the annuity from the next year, i.e., when he turns 55.


• If you want to delay or defer the annuity payout by a specific number of years, you can buy a Deferred Annuity Plan. Under this plan, your annuity payout will be delayed by a specific period - called the deferment period.


For example, Shreya, 45, won Rs. 80 Lakhs in a lottery. She plans on retiring at the age of 55. She invests this 75 Lakhs (after tax) in an Annuity Plan and wants to receive the annuity payout when she retires, i.e., after 10 years. In this case, she can buy a Deferred Annuity Plan and choose the deferment period of 10 years. The insurer will start paying the annuity after the deferment period of 10 years is completed.

Customising the payout period

You can also customise the payout period, i.e., for how long you want to receive the annuity payouts.

• If you want to keep receiving the annuity payouts for as long as you live, you can buy a Life Annuity Plan.
• If you want to receive the annuity payouts for a certain number of years, like 10, 15, 20 years, etc., you can invest in a Certain Annuity Plan.
• In addition to these two options, you can also choose to receive the annuity payouts till the happening of a specific event - such as a critical illness diagnosis or an accidental permanent disability. If you choose to buy a plan with such an option, the insurer will return the total premiums you’ve paid, and the annuity will cease.
  
  Please note, there are some products where the annuity payouts may continue in case you’re diagnosed with a critical illness or get permanently disabled. Not only this, but the insurer may also increase the annuity payable by 50%.

Example:
Karan, 59, invests a lump sum amount of Rs. 1 Crore in a Single-Premium Annuity Plan. He plans to retire at 60 and chooses to receive the annuity payout right after he makes the payment. He chooses to receive it on an annual basis.

SCENARIO 1: Karan wants to receive the annuity for as long as he is alive
In this case, he’ll have to choose a Life Annuity Plan, where the insurer will continue the annuity payouts for as long as he lives.

SCENARIO 2: Karan wants to receive the annuity for 25 years
In this case, he’ll have to buy a Certain Annuity Plan and opt for a payout period of 25 years. The insurance company will make the annuity payouts to him for the next 25 years.

SCENARIO 3: Karan is permanently disabled
Let’s assume -

• Karan buys a Life Annuity Plan, where he is supposed to get an annuity payout of Rs. 1.5 Lakhs every year.
• The insurer has already made 5 annuity payouts to him.
• In the 6th payout year, he gets permanently disabled as a result of an accident. And, the insurer will increase the annuity by 50%.

In this case, after the 6th payout year, the insurer will pay an annuity of Rs. 2,25,000 (1.5 Lakhs + 50% of 1.5 Lakhs) every year to Karan. The annuity payouts will continue for the rest of his life - since it's a Life Annuity Plan.

Customising who receives the annuity

Under a Single-Premium Annuity Plan, you get an option to customise the annuitants, i.e., who’ll receive the annuity payout. Basically, there are two options available to you

• Single Life Annuity Plan, where the annuity will be paid only to you.
• Joint Life Annuity Plan, where you can add your spouse in the same Annuity Plan. In this plan, you’ll be the primary annuitant and your spouse will be the secondary annuitant.
  
  In a Joint Life Annuity Plan, the secondary annuitant will continue to receive the annuity payout after the primary annuitant passes away. They may either receive 100% of the annuity amount or 50% of the annuity amount. This will vary depending on the insurer and product you choose.

Increasing annuity income option

If you buy a Single-Premium Annuity Plan with this option, the annuity amount you’ll receive will keep on increasing every year by a specific percentage, like 3% or 5%. The insurer may give you an option to select the percentage, which may vary across products.

For example, Ayush invests Rs. 1 Crore in an Annuity Plan at the age of 50 years. He chooses to receive the annuity after 5 years and opts for the increasing annuity option.

Let’s assume -

• The annuity payout he’ll receive will increase by 3% every year.
• The annuity payable to him in the first year is Rs. 2 Lakhs.

In the second year, he’ll receive an annuity of Rs. 2,06,000 (2,00,000 + 3% of 2,00,000). In the third year, he’ll get an annuity of Rs. 2,12,000 (2,06,000 + 3% of 2,00,000). And so on.

You’re eligible to receive tax benefits* on the lump sum amount you invest in the Single-Premium Annuity Plan. You can get tax benefits* up to Rs. 1.5 Lakhs under Section 80C of the Income Tax Act, 1961.

The annuity payout you receive under these plans, however, is considered as income. Hence, the payout will be taxable as per your existing income tax slab.

Yes, there are some Single-Premium Annuity Plans that offer a death benefit, i.e., a fixed amount of money to your nominee when you pass away.

Generally, the insurer may return the purchase price, i.e., the premium paid by you at policy inception to your nominee. This is called the Return of Purchase Price by insurers.

• If you buy a Single-life Annuity Plan, the death benefit will be paid when the primary annuitant passes away.
• If you buy a Joint-life Annuity Plan, the death benefit will be paid when the secondary annuitant passes away.

The term of this death benefit could vary from plan to plan. Some may cover the entire accumulation and payout period, and others could cover only for a partial period.

The death benefit that the insurer will pay to your nominee will vary across products.

• Some insurers may pay a specific percentage of purchase price/premium

  The insurer may pay a specific percentage of the premium paid by you as the death benefit to your nominee. This percentage may range from 50 to 110% - it can be 50%, 75%, 100%, 105%, or 110%.

• Some insurers may continue the annuity payouts

  In case you buy a Certain Annuity Plan, where the annuity is paid only for a certain number of years, and pass away before all the annuity payouts are made, your nominee will receive the annuity payouts till the end of the remaining payout period.

• Some insurers may pay the Return of Balance Purchase Price

  Some Annuity Plans come with a feature called the Return of Balance Purchase Price. If you opt for this feature, the insurer will pay the Balance Purchase Price to your nominee if you pass away. Meaning, they will deduct the annuity amount they’ve already paid from the premium you’ve paid, and pay the balance amount to your nominee.
  
  So -
  
  
  Balance Purchase Price = Total Premiums Paid - Annuity Already Paid
  
  In case the total annuity paid by the insurer may exceed the premium you’ve paid, no purchase price will be returned.

Rishi wins a lottery of Rs. 80 Lakhs at the age of 50. Out of this, he invests Rs. 75 Lakhs (after tax) in a Single-Premium Annuity Plan. He chooses to receive a regular income under the Plan every year for a period of 20 years - after he reaches the age of 60. And, let’s assume the annuity rate applicable is 7%. So, the annuity payable under the policy will be calculated as -

Rishi will get an annuity of Rs. 5,25,000 every year.

Let’s assume -

• He has appointed his 50-year-old son Aakash as the nominee.
• The insurer has made an annuity payout for 10 years - so they’ve paid an annuity of Rs. 52,50,000 already.
• In the 11th payout year, Rishi passes away due to a heart attack.

SCENARIO 1: Death benefit is paid as a specific percentage of the total premiums
Let’s assume the insurer will return 50% of the purchase price, i.e., the premiums to Karan’s nominee when he passes away.

So, the death benefit payable to his son, Aakash, will be calculated as -

Death Benefit = 50% of the Total Premiums Paid
= 50% X 75,00,000
= Rs. 37,50,000

Aakash will receive a death benefit of Rs. 37.5 Lakhs and the policy will terminate.

SCENARIO 2: The annuity payout continues even after Rishi passes away
In this case, Rishi’s son Aakash will continue receiving the annuity of Rs. 5,25,000 for the remaining 9 years.

SCENARIO 3: The Return of Balance Purchase Price is paid as the death benefit
In this case, the insurer will pay the Balance Purchase Price to Rishi’s son, Aakash, and the policy will end.

Balance Purchase Price = Total Premium Paid (excluding taxes) - Annuity Already Paid
= 75,00,000 - 52,50,000
= Rs. 22,50,000

So, the insurer will pay a death benefit of Rs. 22.5 Lakhs to Aakash and then, the policy will terminate.

Here’s a list of eligibility requirements you must be aware of before you invest in a Single-Premium Annuity Plan.

Entry age
The minimum and maximum age at which you can invest in a Single-Premium Annuity Plan will differ from insurance company to insurance company.

• Minimum entry age: It can be 18 to 45 years, depending on the product.
• Maximum entry age: It can be 65 to 80 years, depending on the product.

Annuity amount
As per IRDAI regulations, the annuity amount that you’ll receive every year under a Single-Premium Annuity Plan cannot be less than Rs. 12,000.

Deferment period
The annuity payout you’ll receive under a Single-Premium Annuity Plan can be immediate or deferred. Meaning, you can choose to get the annuity immediately after you invest or you can choose to defer/delay it. If you choose to delay it, the insurer will start paying the annuity after a specific time period, known as the deferment period.

• Minimum deferment period: In all Single-Premium Annuity Plans, the minimum deferment period will be 1 year. So, your annuity payouts will start after the deferment period of 1 year gets over.
• Maximum deferment period: This may range from 15 to 20 years - and may differ from insurer to insurer. You can choose to receive the annuity anytime after this period is over.
  
  So, if you choose a deferment period of 15 years, the annuity payouts under your plan will start from the 16th year.

So, that is all about Single-Premium Annuity Plans. Hope you’ve now understood how these plans work, the customisation options available under them, and how they can help secure your retirement.

The succeeding article talks about why you should consider investing in either a General Annuity Plan or a Single-Premium Annuity Plan. Read on!