Annuity Policy: Different types of annuities & Benefits of Investing

What is an Annuity Policy?

Annuity Policy is a fixed sum of money paid at regular intervals to a policyholder by an insurance company for lifetime in return of a lump sum amount invested by the insured. Let’s learn more about it in this post.

It is a fixed amount of money paid annually for lifetime to a policyholder by an insurance company in return of a lump sum one time payment or in installments by the insured. It is like a contract between the person buying the annuity and the insurer offering the plan. Here, the insurer is required to make payments to the insured immediately or in the future after his/her retirement or after a particular tenure as per the terms and conditions of the Annuity.

The most simple form of annuity seen in India are in the form of pension plans where the payouts are given mostly after retirement of the insured.  Most people in India buy annuities to secure their life after retirement.

6 Benefits Achieved by Investing in Annuities

Of course annuities allow several benefits and secures the lives of people, especially after retirement or when they are old and unable to work. Some of the benefits are mentioned below:

1. Annuities levy No Cap of Investment:

Unlike in POMIS or Post Office Monthly Income Scheme and SCSS or Senior Citizens Savings Schemes which levy investment caps on the policy, there is no such cap imposed on an annuity

2. Lowers the Reinvestment Risks:

This is the best benefit that annuities offer as it reduces the chances of reinvestment. So, by investing in an annuity, you can make sure to get payouts at a similar pace forever

3. Source of Income for Life:

Annuity plans allow the policyholder to receive a regular income all through their life, even after they are retired

4. Offer Manifold options to Choose from:

Annuities also allow the flexibility of choosing from a range of options to the insured. The interested individual can avail single life annuity to receive income for life. They can also have a joint life annuity option where they can share the plan with their spouse. The policyholder can opt to receive annuity after a certain period of time. One can even customize annuity plans by using multiple options

5. Tax Benefits:

Annuities allow tax deduction of up to INR 1.5 lakh on the amount paid while buying the plan under Section 80C of the Income Tax Act, 1961

6. Sense of Safety :

With annuity investment, you can be sure of getting a fixed sum at a regular interval so you don’t have to stress about your finances. You can choose to receive the fixed payouts on a monthly, quarterly, half-yearly or yearly basis.

8 Different Types of Annuities

There are varied options of annuities provided by insurance companies in the form of pension plans and life insurance policies. If you want to know about the different types of annuity plans, check them below:

1. Immediate Annuity Plans:

This annuity plan starts immediately from the vesting phase as accumulation phase is not there under this plan. Thus, you get benefits immediately from the vesting time. Under this plan, you need to make a lump sum payment to the insurance company and you can start receiving annuity immediately through your entire lifetime or till a period as per the term of the plan.

2. Deferred Annuity Plans:

The deferred plans of annuity are mostly pension schemes which benefit the insured after their retirement. So, in these plans the insured gets annuity once the accumulation period completes.  There are two different sections of Deferred annuity plans.

3. Accumulation Period:

This is the period when the policyholder purchases the plan and initiates payment of premiums. An amount gets accumulated by the time the policyholder retires, which can be utilized for future purpose.

4. Vesting Period:

This is the time of receiving benefits from the plan. You start receiving a fixed amount on a regular basis as annuity or pension from the start of this period.

5. Periodic Annuity:

Under this plan the person who holds the annuity gets funds at a regular point in time. This is more like a pension plan in which the period of payouts might be on a monthly basis. It can also be paid in a phased method at different times like towards the end of 5th year, 10th year or 15th year and so on.

6. Lump sum Annuity:

This is one of the annuity plans that allow a single amount payout to the annuitant. Such single payment can generally be availed by the annuity holder at a particular time period. However, in this case the whole retirement amount is offered as a single amount. For instance, NPS or National Pension Scheme allow the insured to have 40% of the total sum to be used as pension while the remaining 60% can be availed as a single amount.

7. Variable Annuity:

In case of variable annuity, your premiums are invested in mutual funds, equities and other such instruments. Here, the payouts gained depend on the performance of the fund or investment where you have put in your money. If it performs well, you receive greater returns from the plan. However, you must also be ready for any extreme case as you may lose out on the investment if the fund doesn’t perform well.

8. Fixed Annuity Plans:

A fixed annuity plan is one that allow a definite amount to the annuitant all through the tenure of the policy. The guaranteed amount to be offered is pre-fixed while purchasing the policy and it is not deterred by any market fluctuations.

How does the functioning of an Annuity take place?

Now that you know what annuity is and about the types of annuities, you may  like to know how annuities work? Here are the points:

1. You need to invest a lump-sum amount or in installments to receive an annuity

2. The payout is offered to the person at regular intervals on a monthly, quarterly or annual basis. You may also receive the amount as a lump-sum payment as per the plan of the annuity

3. Various factors decide the payout including tenure of the plan

4. The annuitant can decide if he/she likes to receive the payouts for a particular tenure or as a monthly payment throughout their life

5. Depending on whether you have a guaranteed or fixed payment or whether your payout depends on the performance of the plan, the annuity amount varies