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Features
Ref. No. KLI/22-23/E-BB/1052
Annuity plans offer the best retirement solution since they offer a fixed and assured income for the whole of the remainder of one’s financial years.
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. Let us understand the annuity meaning, its 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. After understanding the annuity plan meaning, we will delve into 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 a 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.
In its simplest definition, fixed or immediate annuity involves paying a fixed sum periodically for the whole span of the policy. This is the closed amount, which is decided, at the time of purchasing this policy. The amount paid to you is between 0.1 to 1.0 percent of the principal investment, with the lower limit guaranteed. It interfaces with the market but does not get influenced or shaped by the occurrences in this market.
In variable annuities, your premiums are invested in things like mutual funds or equities to receive well-known reallocations. Benefits from such plans are accorded based on the returns of the investment you make based on a particular fund. For instance, if the fund returns are high, you get higher passive income, and if they are low, then expect low passive income.
Here below are the pros of each of the annuity plans. This may assist in determining the proper course of action to meet the monetary requirements of the subject.
An immediate annuity plan provides income that is smooth and without any volatility in the later stage of life, i.e., during the retirement period. Thus, the objective of this plan is to help people maintain financial independence in their retirement age, providing people with stable earnings to pay for their needs.
One of the key benefits of annuities, particularly fixed and variable varieties, is that they are tax-deferred therefore the returns on the investment are not taxed until they are withdrawn. It means the investment will also be more effective in growing over time, the retirement fund will be better.
However, annuities have flexibility in the payout method, where people can select from the different income types. It comprises terminal payments, progressive payments or sometimes a mix of both, allowing for flexibility to meet specific financial objectives.
There are even more benefits that come with additional riders such as long-term care coverage coming with many of the annuity plans. These riders help cover other unpredictable cost-of-living contingencies, especially in the area of health care making for complete security in retirement.
Legacy features can also be added to annuities which enable the annuitants to leave behind a financial body when they die. Some of the options offered by the annuity help guarantee that any remaining balance is given back to the beneficiaries, ensuring that the dependents are financially taken care of for generations.
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 for young people to save money. They can protect income and turn it into a corpus with regular payouts for later days.
Annuities can give your spouse or dependents a guaranteed income in case of your untimely demise.
Here is the table for comparing key aspects of annuities and life insurance:
Aspect |
Life Insurance |
Annuities |
---|---|---|
Primary Purpose |
Protect against mortality risk (premature death) |
Manage longevity risk (outliving one’s assets) |
Payment Structure |
Regular premiums paid by policyholder |
Single or series of premium payments by annuitant |
Benefit Payout |
Lump sum death benefit to beneficiaries |
Regular income payments to annuitant |
Tax Implications |
Death benefits typically tax-free to beneficiaries |
Annuity payments may be partially taxable |
Cash Value Component |
Present in permanent life insurance policies |
Not typically present in fixed or immediate annuities |
Common Types |
Term life, whole life, universal life |
Fixed annuity, immediate annuity, variable annuity |
Example Scenario |
Pays out a lump sum upon policyholder’s death |
Provides monthly income upon retirement |
Issuers |
Life insurance companies |
Life insurance companies and investment companies |
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. Before making a decision, understand their features, benefits, and potential drawbacks.
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.
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:
1
You can withdraw money from annuity plans at any time, but there may be fees associated with early withdrawals.
2
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.
3
No, there is no age limit for annuities. However, some annuities may have age restrictions on when you can start taking withdrawals.
4
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.
5
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.
Features
Ref. No. KLI/23-24/E-BB/1052