What is an Immediate Annuity in Life Insurance?

What happens if you run out of money? This is a scary thought that often concerns retirees or those who are nearing retirement from their jobs. That the paychecks will stop and savings will gradually extinguish with no additional income is worrying indeed. But here’s a plan that can keep your savings intact while providing a steady source of income — an immediate annuity in life insurance.

In this article, we will discuss in detail what is immediate annuity is, its benefits, features, and how to pick the best life insurance immediate annuity plans.

What is an Immediate Annuity in Life Insurance?

An immediate annuity in life insurance is an investment plan designed to give you a continuous flow of income at regular intervals. You need to make a one-time investment of a lump sum and decide the intervals (monthly, quarterly, or yearly) at which you want to get the regular payments.
In other investment plans, you usually have to pay premiums for a few years before you start getting paybacks. But in immediate annuity plans, you pay a one-time premium after which you can get payouts immediately within a period of 1-12 months.

Best suited for retired persons who want to convert savings into a lifelong source of fixed income or for those who seek an additional income stream, you can get immediate and guaranteed annuities with this plan. It provides financial security and peace of mind when you have a consistent source of income.

Factors that Affect the Immediate Annuities in Life Insurance Plans

While different insurers offer different returns, a few factors determine the payouts you will get in any immediate annuity plan. It depends on -

• Your age,
• The amount you invest as a lump sum,
• The intervals at which you want to receive the annuity, for example, monthly or yearly, and
• The tenure up to which you want to receive the income, for instance, you can get it for a lifetime, or up to 10 years, 20 years, etc.

How to Invest in an Immediate Annuity Plan?

Here’s how you can invest in a life insurance immediate annuity plan.

Step 1: Decide the amount and the tenure up to which you want to invest, as well as the frequency with which you want the payout. Check out different insurers who provide immediate annuity plans and compare them for optimum returns.
Step 2: Once you finalize, check when you will receive the income. Some plans offer annuity right from the next month, while some may offer it from next year or so. Pick the one that suits you the best.
Step 3: Invest your corpus amount and start receiving an immediate annuity as per the plan.

Example - Suppose you want to invest 20 Lakhs for a monthly annuity. Your payout may range somewhere between ₹6,000 - ₹12,000, depending on the insurer.

Taxation of Immediate Annuity in Life Insurance

Your annuities are a source of income and hence, it is taxable under Income Tax rules. It is categorized under ‘salaries’ and ‘income from other sources’ for tax purposes, and the rate of taxation depends on the income amount and the plan type.

However, even if the annuity or the income is not tax-exempt, the contribution towards it has tax benefits. When you invest in an immediate annuity plan, you can avail of tax exemption for the amount you pay as the premium. Here’s what you need to know -

• You can claim a standard deduction of ₹50,000 or the actual income (whichever is lower) from the taxes you need to pay.
• You may have to pay an additional 10% tax if you start receiving annuities before the age of 59 years.
• You can claim tax benefits under Section 80C of Income Tax for the amount of ₹ 1.5 Lakhs (to be shared with other plans eligible for benefits under this section).
• You can avail additional benefits under Section 80CCD(1) for annuity plans by NPS or other such pension schemes. Similarly, in some cases, you can also claim exemption from taxes under Section 80CCC for pension plans offered by your employers.

Benefits of Life Insurance Immediate Annuity

The immediate annuity’s meaning explains the benefits that come with it — it provides annuity, a regular, fixed income, and you can start receiving it as early as 30 days after. Let’s understand the advantages of life insurance immediate annuity plans.

1. Quick Payouts: No lock-ins or maturity period, but immediate, quick payouts! Although the period after which you will receive the annuity may differ according to different plans, it is for you to decide.
2. Steady Income Flow: Invest once for a constant money flow — a steady income at regular intervals. Use it for post-retirement income or as a second source of income while you are still employed and want to invest your savings.
3. Low Risk: A guaranteed payback from your invested money — a low-risk investment with predictable returns. You already know the annuities you will get over the tenure of your investment, and there is no change in the return rate of a fixed annuity plan once you invest.
4. Tax Benefits: Although the income is not free from taxation, you can avail tax benefits for the investment you make in the plan.
   Customisable: You can always customise the life insurance immediate annuity plans as per your needs — tenure, intervals and even the commencement period of annuity (whether you want to receive it from next month or next year). Although many immediate annuity plans are fixed plans, some insurers also offer inflation-indexed and variable annuity plans.

Who Should Invest in a Life Insurance Immediate Annuity Plan?

The benefits of an immediate annuity in a life insurance plan indicate clearly for whom the plan is. Here’s who should invest in this -

• Retired persons who need an income source (as mentioned earlier).
• People with a substantial amount of money who are looking for a low-risk investment (unlike shares or mutual funds, the rates do not fluctuate depending on the market).
• When you have enough savings, and you want to generate a second income source.
• Want a consistent income source for spouse, children, or family members. You can create a joint account for this plan. However, once created, it cannot be changed later.

In a Nutshell

An immediate annuity plan is an investment plan that gives annuities or paybacks immediately within a period of a month or a year. Requiring a one-time investment or a premium payment, you have customizable options for receiving annuities. It provides a steady source of income, has a fixed rate, and is a low-risk-return investment. Please do consult with a life insurance posp for better understanding.

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