While planning for retirement is one of the most important financial decisions one has to make. But it becomes important to grasp a regular source of income for the post-retirement period due to increasing costs & life expectancy. This is the moment where annuity plans come into play; hence, before selecting your plan, it becomes essential to know the answer to the question: What is Annuity Plan?
What is an Annuity Plan?
An annuity is a financial agreement entered into between a policyholder & an insurance company. In life insurance, it refers to an amount invested in regular payments or in a lump sum, & in return, the insurance provider offers a regular flow of income. This payment will either start immediately (immediate annuity) or after a certain period (deferred annuity).
Features of Annuity Plans
When we have understood “What is Annuity Plan”, let us now understand the salient features of Annuity plans:
- Regular Income Stream
This plan offers a regular income stream throughout your life at a fixed rate, thus helping to fulfil your retirement needs.
- Annuity Options
This plan comes with a variety of options, & one can choose a plan according to one’s needs & preferences. The different plans available are:
- Single Life Annuity Plan
- Annuity with Return of Purchase Price
- Joint Life Annuity Plan
- Joint Life Annuity with Waiver of Premium
- Pension Payout Options
This plan is flexible as it provides options to pay the premium amount monthly, quarterly, half-yearly, or yearly.
- Guaranteed Income
This plan assures receipt of regular & guaranteed payments for complete life tenure.
- Flexibility in Purchase Price
This plan also offers flexibility in the purchase plan chosen, which means the modes available are either contributing regularly over a period of time or in a lump sum amount.
- Nomination Facility
This plan also comes with a nomination facility.
- Tax Benefits:
The payout will be received on a regular basis once the plan matures, but the taxes on payouts are deferred.
- Transparency & Disclosures
This plan does not have any fees or hidden charges.
- Taxation on Income Received
The annuity income is taxable as per the income tax slab under the Income Tax Act. 1961, according to the chosen old or new regime.
Factors Affecting the Life Annuity Rates
With the help of an annuity calculator, annuitants can make informed decisions about the Best Annuity Plan & calculate the annuity rates. The factors affecting the life annuity rates are as provided below:
- With an increase in age, the rates also increase due to mortality risks.
- A higher investment amount attracts high annuity rates.
- The annuity rates are also different according to gender due to different life expectancies.
- The longer the duration of your policy, the lower the annuity rates will be.
Difference between Annuity Plan & Life Insurance Plan
Let us know the differences between an Annuity Plan & an insurance plan:
| Basis of Differences | Annuity Plan | Life Insurance Plan |
| Purpose | This plan helps to offer a regular flow of income to the annuity holder during the course of retirement, offering them a secure financial future. | It provides financial security to the policyholder’s nominees in the event of their unfortunate death. |
| Payment Structure | The payment is to be made either periodically or in lump sum. This will make them receive a regular stream of payouts either on immediate basis or after some time. | Here, under this plan, the policyholder is required to make payments towards the premium on a regular basis against the lump sum amount, which will be received on the death of the policyholder. |
| Risk & Return | The main risk lies with the insurance company as they are required to pay the benefit amount periodically to the nominees at the death of the policyholder, thereby securing their financial future. | The risk changes according to its type. In case of fixed annuities, it offers guaranteed returns & low risks. &, in variable annuity it provides higher risks & returns both. |
| Tax Implication | The income received from annuity plans is taxable as per the Indian Tax Slab Rate. | The premium paid towards insurance is eligible for tax deduction u/s 80C. The death benefits received by the nominees are exempt from the tax u/s 10(10D). |
| Target Audience | It best suits individuals with dependents who want to provide financial security. | It best suits those who are near retirement. |
| Duration of Benefits | The benefits will be received throughout the nominee’s lifetime or for a certain period after the annuity holder’s demise. | On the death of the policyholder |
Steps to Buy an Annuity Plan
Once you have chosen the Best Annuity Plan, the steps to be followed to buy an annuity plan are as follows:
Step 1: Choose an Annuity Plan
Select the type of annuity plan you want to purchase depending on the requirements, frequency of payout, or any other desired feature.
Step 2: Pay the Premium Amount
Once the annuity plan is chosen, the premium has to be paid, which will depend on the type of plan chosen, age factor, desired payout amount to be received, etc.
Step 3: Vesting Age
Decide on the vesting age, which means the age at which you want to start receiving the income earned from this plan.
Step 4: Annuity Payout Options
Decide on the annuity payout option, i.e. frequency & duration of payment, which can be monthly, quarterly, semiannually or annually.
Step 5: Start getting Payments
You will start getting regular payouts from the insurance company once the vesting age is reached, according to the frequency & duration decided.
Step 6: Additional Features
Consider all available annuity plans with different features.
Conclusion
One can consider this plan if they are close to retirement & looking for stability, a diversified income, or a conservative investor wants to have a secure future. Once you have started investing in annuity plans, the funds will not be easily accessible to you till the time the payout phase starts. As early withdrawal will lead to the imposition of a penalty, it is important to get clarity on its terms & conditions.
