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Understanding Annuity Plans

Annuity insurance helps you enjoy a regular lifelong income even without your 9-5 job. Click here to understand what an annuity plan is and how it can help you.

  • 3,355 Views | Updated on: Apr 17, 2024

When you hear the word “Retirement”, a few things immediately pop into your head. From that long-awaited world tour to spending quality time with family and friends or pursuing all the hobbies and dreams you ever had on your bucket list - you picture a post-retirement life where you get to do it all at your own pace.

However, checking these off of your list demands sufficient funds, and acquiring those funds when you no longer have a regular source of income seems nearly impossible. Furthermore, with rising living costs, increasing medical inflation, and longer life expectancies, it is more important than ever to plan intelligently for your post-retirement life.

What if we tell you that fulfilling your dreams is not actually impossible, and you can enjoy the golden period of your life just the way you always wished to? Yes, with annuity insurance, you can enjoy a regular lifelong income even without your 9-5 job.

Let’s understand what an annuity plan is and how it can help you.

Annuity Plans: Your Regular Income Source Post Retirement

Annuity plans are contracts issued and distributed by financial institutions where the funds are invested to pay a fixed income stream later on. Annuity policy was designed to be a reliable means of securing steady cash flow during your retirement years to alleviate fears of the longevity risk of outliving your assets.

These are appropriate financial products for individuals seeking stable, guaranteed retirement income. As long as you comprehend that you are trading a liquid lump sum for a guaranteed cash flow, the product is suitable for you. However, do note, the lump sum put into the annuity is illiquid and is entitled to withdrawal penalties. It is, therefore, not recommended for younger individuals or those with liquidity needs to buy annuity insurance.

Get The Jargons Right

  • Annuitant The individual on whose name the annuity policy is issued, i.e. you
  • Annuity a regular payout received during the policy term
  • Purchase Price The single premium amount paid under the policy
  • Accumulation Phase The period when an annuity is being funded and before payouts begin
  • Annuitization Phase The stage where the payments commence

Annuities exist first in an accumulation phase where you fund the annuity scheme with either a lump-sum or periodic payments. Then, it reaches the annuitization phase, where it begins paying you for a fixed period or your remaining lifetime.

The Types Available

Annuities can be broadly classified into four categories:

  • Immediate annuity There is very little time difference between the accumulation and the disbursal phases in an immediate annuity. This is because the payouts are made immediately as per the terms and conditions of the annuity policy.
  • Deferred annuity A deferred annuity is the exact opposite of an immediate annuity. Due to a more prolonged accumulation phase, payouts in a deferred annuity scheme start from a future date and not immediately.
  • Fixed annuity Under this annuity plan, the payouts will remain constant over the entire tenure. Therefore, it is considered a conservative option, with the money mainly invested into fixed income instruments.
  • Variable Annuity In these types of annuity plans, there occur variations in the payouts between one instance to the next. The variations are majorly linked to the benchmark’s performance or the index to which the underlying investment is mapped.

An Option Worth Chasing

Now that you know what an annuity means, you should also understand why annuity plans in India are so relevant. Numerous reasons exist for buying an annuity policy; however, some of the most prominent ones include:

  • A source of lifetime income You don’t have to retire from life after retiring from work. On the contrary, you may want to maintain the same quality of life even after retirement. An annuity scheme can help you by providing regular income for as long as you live.
  • A secure insurance Annuity plans are free from risks and market-linked volatility. They also help your money grow by fixing higher rates when you buy the plan. These rates are locked for life.
  • Peace of mind and a feeling of self-reliance Annuity plans assure you that you will keep receiving a fixed amount for your remaining life without worrying about maintaining the cash flow.
  • Multiple Payout Options These plans give you the option to customize your payout as per requirements, and you can choose to receive it monthly, quarterly, half-yearly or annually.
  • No Investment Caps Unlike Post Office Monthly Income Scheme or Senior Citizen Saving Scheme that require investment caps, there’s no such limit when it comes to annuity schemes.
  • Additional Benefits Some annuity plans also give you additional benefits like loyalty boosters, extra returns, and more.

You should be aware of its tax implications. Since it provides you with the benefits of payouts, it is treated as a monthly salary. Therefore, the income tax authorities tax it as per prevailing income tax slabs. Annuities are promising investment avenues that provide a steady and regular stream of money to the dependents.

Entrusting your hard-earned money to the appropriate suitable annuity plan is the solution to your need for guaranteed and regular income in the sunset years of your beautiful life. After all, it is specifically designed to meet your long-term retirement goals. However, to reap the benefits of all the seeds you sow, you should start early and strategically select the right plan as per your requirements. With the right annuity plan by your side, you can make your retirement years a memorable new chapter of your life.

- A Consumer Education Initiative series by Kotak Life

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

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