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Curious about what is an annuity plan and how it works? Read this blog to find out more about annuity plans, who should buy it, and what it offers.
Updated on:28 September 2023
Picture yourself standing at the crossroads of your financial journey, unsure which path will lead you to stability, certainty, and worry-free retirement. Whether you seek stable growth, tax benefits, or a balance between the two, there is an annuity plan that aligns perfectly with your needs.
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. This blog discusses the annuity plan meaning, need, importance, benefits, and everything related to annuities.
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.
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:
In this annuity plan, you will receive regular payments (monthly/quarterly/yearly) throughout your life.
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.
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.
With a joint life annuity, you can continue to enjoy the benefits of an Annuity plan throughout your or your spouse’s lifetime.
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.
Here are a few reasons why an annuity plan is worth chasing:
Annuities aim to reduce people’s concerns about outliving their assets by supplying a steady cash flow during their retirement years. Some investors may decide to purchase an annuity contract from an insurance company since their current wealth might not be sufficient to maintain their standard of living.
An annuity plan can be a good option for people who are looking for a guaranteed income stream in retirement. Here are some of the people who might benefit from buying an annuity plan:
Annuities are a good option for people nearing retirement age. It can provide a guaranteed income stream for the rest of your life, which can help you avoid running out of money after retirement.
Annuities can prove an excellent way of saving money for young people. They can protect your income and turn it into a corpus with regular payout for later days.
Annuities can give your spouse or dependents a guaranteed income in case of your untimely demise.
Buying an annuity involves several steps, and it is crucial to consider the process carefully. Here is a guide on how to purchase annuities:
Determine your financial goals, risk tolerance, and how an annuity fits your retirement plan.
There are various types of annuities, such as variable, fixed, and indexed. Understand their features, benefits, and potential drawbacks before making a decision.
Research reputable insurance companies or financial institutions that offer annuities. Compare their product offerings, fees, and customer reviews.
Read and understand the annuity contract thoroughly. Pay attention to payout options, surrender charges, death benefits, and potential penalties for early withdrawals.
Determine how you will fund the annuity. You can make a lump-sum payment or contribute through regular premium payments.
Once you have selected the annuity that suits your needs, complete the necessary paperwork and submit the required funds to the insurance company or financial institution.
Annuity plans are excellent sources of income, along with the flexibility of payout. Explore other benefits of annuity plans below.
The fact that an annuity plan offers a consistent income throughout your life, including after retirement, is one of its primary characteristics.
This gives you the freedom to select a plan that meets your needs. You can choose either the joint or single life option to get 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.
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 lakhs.
The best time to buy an annuity plan depends on your financial position and goals. However, here are some factors to consider:
Buying an annuity closer to retirement age or in retirement is more advantageous. You can receive payouts sooner and potentially benefit from higher payout rates.
Prevailing interest rates often influence annuity rates. If you expect interest rates to rise, you should wait for a higher payout rate. Conversely, locking in a rate sooner might be beneficial if rates are expected to decline.
If you have investments heavily tied to the market, purchasing an annuity during a market downturn might offer stability and protection against potential losses.
Consider your overall financial portfolio, risk tolerance, and retirement income needs. Annuities should complement your existing financial plan, so assess whether they align with your long-term goals.
Annuities can have different tax implications depending on the type of annuity and the country’s tax laws. Generally, annuities can be taxed in two ways: during the accumulation and distribution phases.
During this phase, when you contribute money to an annuity, the growth within the annuity is generally tax-deferred. You will only pay taxes on any earnings or interest once you withdraw funds.
When you start receiving payouts from the annuity, your amount will be subject to taxation. The entire withdrawal will be taxed as ordinary income if you have a qualified annuity (funded with pre-tax dollars, like a retirement account). Suppose you have a non-qualified annuity (funded with after-tax). In that case, only the earnings portion of the withdrawal amount will be taxed as ordinary income, while the original contributions will not be taxed again.
It is essential to consult with a tax professional to understand the specific tax implications based on your situation and your type of annuity.
An annuity calculator is a straightforward method that can provide valuable financial planning insights. Here is a step-by-step guide on how to use an annuity calculator:
Remember that annuity calculators are valuable tools for estimating potential outcomes but are based on assumptions and projections. Actual results may vary due to market fluctuations and other factors.
Annuity plans are like hidden gems in the field of financial planning, offering a unique blend of security and stability. They can be immensely valuable for individuals seeking a steady income stream during retirement or looking to diversify their investment portfolio. So, take the time to explore the various types of annuities, understand the tax implications, and consult with a financial advisor who can help you tailor an annuity plan to match your unique needs and aspirations.
You can withdraw money from annuity plans at any time, but there may be fees associated with early withdrawals.
Yes, an annuity is different from a mutual fund. A mutual fund is an investment tool that allows you to pool your money with other investors to buy a variety of securities. An annuity is a contract with an insurance company that provides you with a guaranteed income stream.
No, there is no age limit for annuities. However, some annuities may have age restrictions on when you can start taking withdrawals.
The best age to buy annuity plans depends on your individual circumstances. However, annuities can be a good way to guarantee income in retirement, so it may be a good idea to consider buying one if you are nearing retirement age.
Annuities can be a good way for senior citizens to guarantee income in retirement. However, it is important to carefully consider the different types of annuities available and the fees associated with each one before making a purchase.