Comprehensive Guide on Annuity in Life Insurance

Planning for retirement is important for everyone because it will ensure one can have a steady source of income after one’s working life is over and regular income stops post-retirement. While the Indian market provides numerous financial products for retirement planning, annuity plans are often desirable. In this blog, we cover what is an annuity plan, its benefits, different types of annuity plans, etc., so you can make informed retirement planning decisions.

What is Annuity in Life Insurance?

An annuity is a formal, legal contract between a policyholder and an insurer that requires the insurer to pay the policyholder immediately or later on specified dates, in exchange for a lump sum premium payment or regular smaller premium payments.

Since annuities are designed to provide guaranteed payment on pre-agreed terms, they are considered the safest retirement planning tool for most Indians. There are different types of annuity in life insurance, each with unique features, positives, and drawbacks, so invest in plans that align with your long-term financial goals.

How do Annuities Work?

An annuity plan is a risk-free retirement tool in which the insurance company agrees to pay a specific amount immediately after a lump sum premium payment or later in the future (mostly retirement years) against regular premium payments.

If you plan to rely on annuity payments as the major post-retirement income source, estimate your approximate financial requirements during the retirement phase and invest accordingly. You can use an online annuity plan calculator to ease the process.

Benefits of Annuity Plan

Now that you have a basic understanding of what is an annuity, let’s explore the various benefits attached to this plan.

• Guaranteed Income

Annuity plans are among the best Retirement Plans because they guarantee stable and predictable payments, bringing ease and comfort during retirement. However, the returns may fluctuate for unit-linked annuity plans.

• Lifetime Coverage

If you research ‘what is Annuity Insurance’ online and the different types of annuity insurance, you will come across some life annuities that provide lifetime income options. These plans ensure your expenses don’t outlive your savings till you’re alive.

• Tax Benefits

The premiums you pay toward annuity plans are exempt from tax u/s 80 C, making them great tax-saving tools. Annuity earnings are covered by tax-deferred growth, meaning these earnings won’t attract tax until you start making withdrawals.

• Risk-free Returns

Fixed annuities provide risk-free and predictable payments, irrespective of the market conditions. Fixed annuities are ideal if you have a low-risk profile and want to enjoy a steady, fixed income during retirement.

• Flexible Payment Options

Policyholders can choose to receive payments monthly, quarterly, or yearly, depending on their preference and financial obligation. It provides flexibility and ease in managing finances during golden years.

• Potential for Higher Returns

Investing in unit-linked annuity plans, like Shriram Life Pension Plus, enables policyholders to build wealth over a period through market-linked gains.

Different Types of Annuity Plans

The best way to understand what is annuity insurance is to get into the specifics of the product instead of stopping at the fundamentals. Currently, the Indian market has the following different types of annuity plans:

• Immediate Annuity

As the name suggests, an immediate annuity plan is designed for individuals who want to receive income after investing a one-time, single payment. These plans can start giving regular income as early as within a month. Immediate annuity policies are better suited for those nearing retirement.

• Deferred Annuity

Deferred annuity plans are tailored for individuals who want to accumulate wealth over time before receiving payouts. You can invest in this plan by making a lump sum or regular premium payments, and these investments will grow during the accumulation phase. Unlike immediate annuity plan, deferred annuity plans’ payment phase begins at a later date, typically after retirement. It is well suited for young individuals or those in their 40s or 50s.

• Fixed Annuity

Fixed annuities are great for people who want a stable and predictable income to lead a comfortable post-retirement life. They are considered the safest annuity plan for individuals who seek financial security, regardless of market conditions. Insurers pay a fixed rate of interest on such investments and the payment also remains fixed unless specified otherwise in the policy documents. You can consider diversifying your retirement portfolio by investing in our Savings Plans and Protection Plans for additional income potential.

• Variable Annuity

Variable Annuities are a dynamic retirement planning tool because they provide variable returns in exchange for a lump sum investment. The premiums paid in Variable Annuities are invested in different financial securities like mutual funds, bonds, stocks, etc., whose returns are tied to market performance. You should choose such annuity plans only if you have a moderate to high-risk profile.

• Life Annuity

A life annuity plan is designed to give you a steady income stream throughout your life. It ensures you don’t outlive your savings, giving you a relatively comfortable life. Some life annuities extend this benefit to the policyholder’s spouse so they continue receiving timely payments even after their partner’s death.

How to Select an Annuity Plan?

Simply knowing what is annuity insurance won’t help you choose the right plan aligned with your financial goals. If you want to select the best annuity plan for your retirement, follow the below-mentioned tips:

• Assess Your Financial Goals

Before looking for any retirement annuity plans, calculate your anticipated monthly expenses during retirement, including daily expenses, potential medical costs, unexpected expenses, etc. Now, search for plans that can help you receive the estimated figure.

• Evaluate Risk Tolerance

Different annuities have varying levels of risks involved, so choose a plan that aligns with your preferred risk tolerance level. For example, people with low-risk profiles can stick to fixed annuities, while those with moderate to high-risk profiles can explore variable annuity plans.

• Factor in Inflation

Inflation can erode your purchasing power significantly, and even affect your retirement fund if you don’t consider it during your planning phase. Consider looking for annuity plans with inflation-adjusted payouts, so your income stays at par with the rising living cost.

• Research about the Insurer

A trustworthy insurer with a good track record will provide a hassle-free and seamless experience throughout the policy tenure. So, always check the insurer’s reputation, claim settlement ratio, reviews, news, etc., before finalizing one. It will save you from unwanted stress later in life.

Compare Similar Annuity Plans

Whether you’re looking for deferred & immediate annuity or fixed annuity, you should always compare similar types of policies before finalizing one. Comparing similar options will ensure you get a better plan with the best features and reasonable premiums.

Which Annuity Plan is Most Suitable for You?

Different annuity plans are recommended for people with varying goals and risk appetite. For example, an immediate annuity can be more suitable for retirees or those nearing retirement seeking instant income. On the other hand, deferred annuities can be more suitable for young individuals who want to build wealth and a large retirement fund over time.

Fixed annuities are great for people seeking a stable and risk-free income during retirement, whereas variable annuities are ideal for people with moderate to high-risk appetites. Always evaluate your financial condition, goals, obligations, etc., before choosing the right annuity plan.  

What is the Best Time to Buy an Annuity Plan?

It depends on your current life stage and financial readiness. People in their 30s and 40s can consider buying a deferred annuity plan because it builds a substantial retirement fund over a period, generating higher returns. Those nearing retirement or in their 50s and 60s can purchase immediate annuity plans to convert their accumulated savings into a steady income stream.

Example of an Annuity

Atal Pension Yojana (APY) is a great example of an annuity because this government-backed pension scheme works exactly like traditional annuity plans. It requires individuals to pay a fixed premium during their active working years. Once they reach the age of 60, they can start receiving pension payment for life. The payment amount is determined based on the contribution amount and the age at which they started contributing. The pension benefit can be passed to their spouse in case of their death.   

Conclusion

Your retirement years should be reserved for enjoying life, not worrying about daily expenses. While numerous retirement plans in the market can be strategically chosen to build a significant retirement fund, an annuity plan comes across as the ideal option for most individuals. If you want a sense of stability and predictability for post-retirement income, consider checking our Shriram Life Assured Income Plan. It features the benefits of savings, retirement, and child plans in a single policy.

This plan provides a regular income option to assist you with your monthly expenses. Our Shriram Life Early Cash Plan is a better choice if you want to get a larger lump sum on retirement or policy maturity. It features cash bonus guarantee, power of compounding, life cover, etc., to help you achieve your long-term financial goals. You can also explore the different annuity plans provided by Shriram Life Insurance to secure your golden years.