Life insurance not only helps you secure your family’s financial future, but also ensures that your retirement planning goals are taken care of. Annuity plans, in particular, are specifically designed to ensure that your post-retirement life is stress-free and financially secure. Wondering what annuity is all about? Let’s decode this segment of life insurance for you.
What is annuity?
The term ‘annuity’ essentially refers to a sum of money that is paid out to a person periodically, for the rest of their life. In the context of retirement planning and life insurance, annuity plans or pension plans are life insurance policies that allow you to enjoy regular income even after you have retired.
To know how much retirement annuity you will need to lead a comfortable life in your golden years, you can make use of a retirement calculator. Then, based on your specific needs and the requirements of your family, you can choose the suitable kind of annuity plan.
Want to find out more about the different types of annuity plans available to you? Check out the alternatives in the following section.
Different types of annuity
Based on the nature of payment of the retirement annuity, pension plans or annuity plans are of two major types.
1. Immediate annuity plans:
In immediate annuity plans, the annuity payments start right away. The insurance service provider agrees to pay the annuity amounts to the policyholder immediately after they have purchased the plan. This is why they are known as immediate annuity plans.
2. Deferred annuity plans:
In deferred annuity plans, the annuity benefits accumulate over the investment period. And then, the annuity payouts from the insurance company start at a later date, after a predetermined number of years following the purchase of the plan.
How do different types of annuities work?
To understand the different types of annuities better, let’s see how they work.
1. Immediate annuity plans:
- Here, the policyholder pays a lump sum amount to the insurance provider at the time of purchase of the policy.
- From the next month, quarter, or year, as the case may be, the insurer starts to pay out periodic annuity payments to the policyholder.
- There are different kinds of annuity options under this category, some of which are:
- Life annuity
- Life annuity with return of purchase price
- Joint life annuity
- Joint life annuity with return of purchase price etc
2. Deferred annuity plans:
- A deferred annuity plan has an accumulation phase and an income phase.
- The accumulation phase begins when you purchase the plan and ends on the date you choose to start receiving the annuity payments.
- During this phase, you invest in the plan and wait for your retirement corpus to grow. Note that this option is only available in select plans which have an option to pay on regular basis.
- Then, when the income phase begins, you receive monthly payouts.
FAQs on Annuity Plans
1. Which kind of annuity plan is suitable for me?
If you are closer to retirement and want to replace your regular income with annuity payouts, an immediate annuity plan is more helpful. On the other hand, if you have a significant working life ahead of you, you could choose deferred annuity as your option.
2. Do annuity plans offer tax benefits?
Yes, they do. The contributions you make to your pension plan are eligible for deductions as per section 80CCC of the Income Tax Act, 1961 subject to the provisions stated therein. The limit on this is Rs. 1.5 lakh per financial year.
3. Will my annuity plan also cover my spouse?
To include your spouse in your annuity plan, you can choose the joint life option when you purchase your annuity plan.
So, what are you waiting for, consider planning for your retirement goals now and secure your future with retirement annuity plans.
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