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Types of Annuity Plan | Annuity Definition - Meaning & Key Benefits

An annuity plan is an easy way to create your financial retirement net. Learn about the different types of annuity plans and their key benefits before you opt for one.

  • Nov 22, 2022
Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

Your post-retirement years are for you to live a stress-free life. If planned correctly, you will not need to worry about taking care of your financial needs. There are a lot of financial plans available out there, that help you in your retirement years. One of the effective products for taking care of your financial needs in your post-retirement life is an annuity plan.

What is an annuity plan?

An  annuity plan is is simply a chain of periodic payments that are made in a time interval. Hence, the payouts will work as a regular source of income. An annuity plan is an easy way of creating your financial net for your retirement. It is considered a form of insurance, instead of an investment alternative. If you wish to get an annuity plan, you must read up on the types of plans. Depending on your needs and requirements, you can select from the different annuity plans available.

Different types of annuity plans and their key benefits in India are:

Immediate Annuity:

In an immediate annuity plan, the premium for the policy is paid in a lump-sum and not through multiple, regular payments. This plan will help you get the payout as soon as the first investment is made. Additionally, you will get guaranteed payouts at regular time intervals.

  • Optimal for individuals who are close to their retirement age and are looking for immediate guaranteed income.
  • You can defer taxes until late in your retirement.

Fixed Annuity:

In this plan, the payout is the same for the entire time period of the plan. The duration of the plan is also fixed. Hence, even after the policyholder’s demise during the tenure, their beneficiary or spouse will keep receiving the payout. The funds from this plan are invested in fixed income instruments.

  • Preferred as pension payout as it offers guaranteed income to policyholder.
  • Payouts remain constant for the entire tenure of the plan

Lump-sum Annuity:

While some annuity plans offer payouts at regular intervals for a specified time, some plans provide a lump-sum payout option. However, this plan is an alternative and is accessible only at a specified period.

  • Can help take care of emergencies that require massive financial help.

Variable Annuity:

A variable annuity is a plan designed to provide variable annuity payouts throughout the plan tenure. The payout is not prefixed like the other types of annuity plans. The money is invested in mutual funds, and the return will depend on the performance of the fund the money is invested in.

  • The payouts will be high when the returns are good.

Deferred Annuity:

In the deferred plan, the policyholder’s funds are invested for some period before the payments are made.

  • Optimal for individuals who are still in the workforce and have some years left before retirement.
  • Can use the accumulated funds to purchase an annuity at the time of retirement.

Example of an annuity

In India, two excellent examples of annuities are the Pension Guaranteed Plan and the Immediate Annuity Plan.

An immediate annuity plan is a standard, non-linked annuity that gives you access to a range of annuity options and the freedom to live your life how you want, even after retirement.

It provides you with guaranteed income at a frequency of your choice (monthly, quarterly, half-yearly, or annual possibilities) for as long as you or your partner lives. Higher annuity rates are available for investments of ₹2,50,000 or more. Additionally, certain annuity choices that offer your spouse a refund of the purchase price or annuity accrue a death benefit.

Pension Guaranteed Plan, on the other hand, is a single-premium annuity programme that offers a consistent, lifelong guaranteed income. You can choose to purchase this type of annuity by selecting the purchase price you want to pay or the annuity amount you want to receive.

Who Buys Annuities?

After making a specific amount of premium payments, the policyholder receives payouts under an annuity. These premiums may be paid all at once or in equal monthly payments. These payouts are advantageous since they act as a source of income after retirement or when a person’s normal income is lost. Because of this, the majority of people purchasing annuity policies will either be in or close to retirement.

Purchasing annuities when you are younger is a smart move since you receive a value advantage. Additionally, you are better equipped to withstand any unfavourable effects and have sufficient room to adjust your route. Financial experts advise purchasing annuities in moderation, despite the fact that factors like tax and interest rates may dull their shine. They also see annuities’ lack of liquidity as advantageous since it helps policyholders preserve their retirement savings. Because you do not have to go through the hassle of receiving a medical checkup to rule out any health risks, annuities are also simpler to purchase than life insurance.
In the absence of suitable alternatives, an annuity helps people who want to retire with a guaranteed savings plan and regular income. Some people’s needs are met by the projected income, and they can use their various reserve funds and speculations to offset rising expenses and other factors that affect their average cost of basic things. Instead of aiming for head growth while obtaining an annuity, your goal should be to achieve long-term pay security. An annuity can be the thing to rely on if you anticipate needing a fixed income in retirement.

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  • 6 Plan Options
  • Tax benefits ^
  • Higher annuity rates for higher purchase price
  • 4 Annuity Modes

Ref. No. KLI/23-24/E-BB/1052


- A Consumer Education Initiative series by Kotak Life