What is an Annuity?
In simple words Annuity means the amount of pension received/ receivable from a pension plan. Annuity is a monthly/quarterly/half yearly/ Annual payout received from a pension plan. This payout is paid by the insurance company to the policyholder after maturity of a pension plan. In a Annuity plan, the policy holder pays the premium(purchase price) for a certain period after which they receive annuity from the insurance company.
Normally in India, awareness about pension plan is very less when compared to the life insurance plans. Many of us plan for the shorter term and never care about the future part. This is where the problem starts. Years run very faster and when reaching our retirement period many of us start to worry about the savings we have for our future after retirement. We have to be very cautious when planning our savings in the younger ages. We should start to save at least a minimum of 5% to 10% of our income towards our retirement. Post Retirement period is the time where we have nil income and more expenses(food, shelter and clothing accompanied with medical expenses).Though this is a period where we need an extra financial support to our family income, most of us lose our income. And the toughest part is that maximum people tend to fail in saving for these retirement age.
Lets take a look on the types of annuity and various annuity options provided by the insurance companies in India.
Types of Annuity
Annuity is of two types as follows.
Immediate annuity: In an immediate annuity plan, the annuity starts immediately after paying the purchase price. The Annuity is payable after 1 month/3 months/6months/ 1 year basis the mode of pension payment chosen. Normally in this immediate annuity plans, purchase may be a single time lumpsum amount.
If you had neared your retirement age(age above), you have to choose immediate annuity option because the accumulation period is very short.
Deferred Annuity: In a Deffered Annuity plan, the annuity is paid at the end of the maturity of the policy. Here the policyholder pays the premium(purchase price) for a particular tenure after which the policy matures with some added returns to the premium paid. Pension is paid as annuity after maturity till the death of the policyholder.
if you are between age group 20 to 45, you can go for a deferred annuity because you have some time left to contribute towards the purchase price.
Annuity options available
- Option I : Annuity payable for life at a uniform rate.
In this option, Annuity is payable till the death of the policyholder.
Example: Mr Arun aged 58 has taken an life annuity option and has died at age 70. He will receive the pension till his death after which the annuity is stopped and the policy gets terminated without any benefits thereafter.
- Option II : Annuity payable for 5, 10, 15 or 20 years certain and thereafter as long as the annuitant is alive.
In this option, Pension is payable till the death of the policyholder. An addition to option I, the pension will be paid to the policyholder atleast for the guaranteed years taken in the plan. This means if the policyholder dies before the said period, legal heirs of the policyholder will receive the benefits of the plan for the balance of the guaranteed years.
Example:Mr Arun aged 58 has taken an life annuity with 20 years guaranteed option and has died at age 70. Since he has taken 20 years guranteed option, even after his death the pesnion is paid to his nominees/legal heirs for the next years(already he has received pension for 12 years so the balance is 8 years).
- Option III : Annuity for life with return of purchase price on death of the annuitant.
You will receive the pension till your death and after which your nominee will receive the return of the purchase price.
Example: Mr Arun aged 58 has taken an life annuity option and has died at age 70. He will receive the pension till his death after which the annuity is stopped and the policy gets terminated by paying the purchase price to the nominee.
This option have two types to choose from.
- Annuity for life with a provision of 50% of the annuity payable to spouse during his/her lifetime on death of the annuitant.
- Annuity for life with a provision of 100% of the annuity payable to spouse during his/her lifetime on death of the annuitant.
- Option IV : Annuity payable for life increasing at a simple rate of 3% p.a.
In all the above options, the pension amount remains constant and fixed. But in this option the pension amount increases at 3% per annum simple interest. And the benefit is paid till the death of the policy holder Some companies provide 4% and 5% increasing rate.
- Option V : Joint life Annuity
Here the pension will be paid to the spouse even after the death of the policy holder.
Example: Mr Arun aged 58 has taken an life annuity option and has died at age 70. He will receive the pension till his death after which the annuity is paid to the spouse of the policy holder. After the death of the spouse, the policy gets terminated without further benefits.
How to choose the annuity type and option?
You have 5 annuity options available to choose in the market. You have to decide on which type you would like to go with. Life time annuity(option I) gives the maximum pension amount. Pension amount defers for each option you choose. Once you had chose the Option you cannot change between these options in between. There is no special ideas or special suggestion for choosing the annuity option. But you have to compare between the annuity rates between the companies in the market to get the maximum benefit. And also look out for the longevity and sustainability of the company in longer term to make sure that you and your family doesnt feel any problem when receiving the pension amount.
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