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What is an Annuity Plan, and How Does Annuity Plan Work?

Annuity plan - Find out what is an annuity plan and how it works on this article. Visit Kotak Life to know more about annuity plan

  • Feb 16, 2021

In a world of uncertainties, an annuity plan is one of the most certain things you can rely upon. However, different types of annuity plans are offered in India based on the needs of an individual. Therefore, you must choose one which suits your financial needs perfectly.

What is an Annuity Plan?

In simple terms, an annuity plan is a chain of periodic payments you receive from time to time from a lump sum amount previously paid by you.

For an individual, their other life assets might deplete over time for some reason or the other. Still, an annuity plan can offer the guarantee of assured income.

How Does Annuity Work?

As said previously, one can choose from a wide range of annuity plans based on their requirements. Each plan works differently. We will look at some common types of annuity plans and how they work below:

  • Life Annuity: In this annuity plan, you will receive regular payments (monthly/quarterly/yearly) throughout your life.
  • Life Annuity with Return of Purchase Price: This plan is similar to Life Annuity, where you shall receive regular monthly payments. However, after your demise, the insurance company will pay your nominee’s initial investment (used to buy the annuity). You can consider this option if you want to pass on some finance to your loved ones after your demise.
  • Guaranteed Annuity: With Guaranteed Annuity, you will receive regular income for a defined period of time (e.g. 5, 10 or 15 years). In case of your demise, your nominee will start receiving the same. Annuities will stop after the completion of your guarantee period or the demise of the annuity holder, whichever falls later.
  • Joint Life Annuity: With Joint Life Annuity, you can continue to enjoy the benefits of an Annuity plan throughout your or your spouse’s lifetime.
  • Joint Life Annuity with Return of Purchase: Similar to Joint Life Annuity, with this plan, after the demise of you or your spouse, the nominee will receive the original investment amount used to buy the plan.

Why do you need an Annuity Plan?

Here are a few reasons why an annuity plan is worth chasing:

1. Offers you a fixed income for the rest of your life, which means financial freedom with the help of a retirement annuity during your sunset days.

2. Flexibility to choose between monthly or yearly payouts.

3. Tax benefits based on current tax provisions.

4. Ability to withdraw money after being diagnosed with a critical illness.
5. Flexibility for premium payments for your annuity plan offer.

How do annuities work?

  • You must first invest a large sum of money in the annuity plan offer.
  • You will get payments from the annuity at a later date or dates. On a monthly, quarterly, or annual basis, this can be given.
  • The length of the annuity is one of many variables that affect the payout of the annuity or pension.
  • You have the choice of receiving pension benefits for the rest of your life or for a set amount of time.
  • The annuity or pension income is also based on your choice of a fixed annuity, which is a guaranteed payout, or a variable annuity, which has a pay-out stream that is based on how well the underlying investments perform.

Who should buy an Annuity plan?

An annuity plan offer should be taken into consideration if you want a lifetime of assured income, particularly after retirement. An annuity plan’s main goal is to provide you with financial security throughout your retirement years when your regular income quits. The income from an annuity plan offer can be used to pay for retirement expenses as well as to pursue post-retirement goals, including travel, business ventures, hobbies, and more.

Benefits of Annuity plans

Lifetime source of income

The fact that an annuity plan offers a consistent income throughout your life, including after retirement, is one of its primary characteristics.

Multiple options to choose from

This gives you the freedom to select a plan that meets your needs. You have the choice of selecting either the joint or single life option to getting income for the rest of your life. You can choose to wait a set amount of time and then request your money back. Numerous options are available in annuity plans that let you tailor the plan to your needs.

Tax benefits

Under Section 80C of the Income Tax Act of 1961, the plan premium you pay at the time of purchase is eligible for a deduction of up to ₹1.5 lakh.

Annuity Plans with Kotak

Kotak Life offers an immediate annuity life insurance plan - the Kotak Lifetime Income Plan. The plan offers an assurance of lifetime income for the policyholder and guaranteed lifetime income for the spouse in case of the policyholder’s death.

The top features of the plan include:

1. Assurance of financial independence in your post-retirement life.

2. A choice between 6 annuity options to match your specific requirements.

3. Flexible monthly, quarterly, half-yearly and yearly payout modes to suit your goals.
You can calculate your premium outflow with the Kotak Premium Calculator.

In this policy, the investment risk in the investment portfolio is borne by the policyholder.

Kotak e-Invest

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  • Return of Mortality Charges*$
  • Enhanced Protection
  • Multiple Plan Options
  • Zero Premium Allocation Charges
  • Tax Savings^

Ref. No. KLI/22-23/E-BB/521


- A Consumer Education Initiative series by Kotak Life

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