What are Annuity Plans?

What are Annuity Plans?

A breadwinner of the family has one and only one responsibility i.e., to ensure the family is well looked after. However, this brings a tremendous amount of stress. In this era of hectic schedules, people can hardly think of planning their retirement. Having said that, it is important to ensure a relaxing retirement for every employee. Post-retirement, many expenses come down. However, some major financial obligations still exist. In order to meet such financial requirements, people should start investing in annuity plans. An ideal option to help retirees with a regular or lump sum income.

Annuity Schemes

Annuity plan is a pension plan. It enables the policyholder to receive a regular or a lump sum income in order to meet the financial requirement. An individual may make an investment in an annuity plan either in installments or in the form of a lump sum amount. The amount invested by the policyholder shall be utilized in order to fetch returns. The returns shall be payable to the policyholder by the insurance company during retirement.

The annuity plans offer investment options to the policyholders ensuring they accumulate enough funds for their retirement. The options are also offered for the convenience of policyholders.

Type of Annuity Plans in India

Let us discuss the types of annuity schemes.

Immediate Annuity

An immediate annuity is a type of annuity plan where the policyholder pays a lump sum premium to the insurance company. Unlike other annuities, the policyholder does not pay the premium multiple times or in installments. Under an immediate annuity, the policyholder receives a guaranteed payout at a regular or pre-defined period. Generally, the people who are on the verge of retirement buy the immediate annuity scheme. This scheme helps them receive a fixed income every month soon after enrolment and pay the premium amount.

Deferred Annuity

Deferred annuity consists of two phases. Accumulation phase and vesting phase. In the accumulation phase, the policyholder starts accumulating a significant corpus as a premium. He pays the premium to the insurance company. Unlike an immediate annuity, the deferred annuity does not start paying the policyholder immediately after paying the premium. In the first phase, the policyholder is expected to pay the premium in order to build a considerable corpus. Later, the money is invested in the annuity plan which generates a regular income for the policyholder. This phase is known as the vesting phase where the policyholder starts receiving a regular payout in the form of pension. A deferred annuity is also considered a pension plan. The buyer of such a plan purchases the annuity with the accumulated income he builds by paying the premium. The deferred annuity is an ideal plan for policyholders who do not require an immediate payout. An individual may start accumulating the corpus from the early phase. The deferred annuity is recommended for the young employee who wishes to have another source of income during retirement.

Fixed Annuity

The fixed annuity plan offers a fixed rate to the policyholder. It provides a guaranteed corpus to the individual post-retirement. The plan remains static and does not change throughout the period. The interest rates also remain the same as assured to the policyholder. The company of such plans invest the premiums of the policyholder in the safe and fixed instrument. The policyholder paying the premium at a time without any discontinuation is likely to receive a fixed income after retirement. The fixed annuity is an ideal choice for risk-averse individuals. It is also an ideal plan for policyholders who believe in traditional investment plans.

Variable Annuity

Unlike a fixed annuity plan, the variable annuity does not promise a fixed payout to the policyholder. As the name suggests, the interest rate in variable annuity keeps changing. However, if the market performs well, the policyholder may fetch a better interest rate as compared to the fixed annuity plan. The insurance company under variable annuity invests the funds of the policyholder in mutual funds. Nevertheless, the funds under which the premium invested are chosen by the buyers. Hence, the buyer shall be responsible in case of choosing the wrong investment instrument. In addition, the payout under this plan explicitly depends on the performance of funds. Therefore, the funds may either vary or remain fixed throughout the tenure of the plan.

Benefits of Annuity Schemes

Let us discuss the benefits of annuity policies.

Safe and Reliable Income

Annuity plans are a safe and reliable source of income. It helps the policyholder manage the post-retirement expenses.

Everyone strives to accumulate a significant sum from their current income. However, it may not be enough to bear the retirement expenses. Only a saving sum is not likely to help an employee build a considerable corpus for retirement. It is important to fetch a considerable interest on the savings amount in order to sustain a standard of living during retirement.

The savings of an employee must grow with time. The annuity plans are among the safest plans available as a financial instrument which creates wealth as shares and stocks do. However, it does not include higher risk factors as compared to other instruments. The policyholders under annuity schemes may choose the frequency for paying the premium amount. The frequency can be monthly, quarterly, half-yearly, annually etc.

Annuity plans are not considered for short-term periods. An individual at an early age must start buying annuities to ensure a safe retirement. The annuity plan also allows the policyholder to choose a nominee who shall receive the income in case of the demise of the policyholder.

Uncertainties

The accumulated fund in the annuity plan is not only enough for essential needs. At the same time, it also helps the policyholder in order to deal with uncertainties. The annuity plan offers guaranteed returns which beats inflation rate and helps individuals generate a significant corpus. It prepares the policyholder to deal with the unprecedented emergency with ease. Therefore, the employees must purchase annuity policies.

Stable Income

The annuity plan assures the policyholder a stable income during retirement. The insurance companies invest the funds of the policyholder in various kinds of financial instruments. Therefore, the premiums paid by policyholders fetch a considerable return. Such returns and the premium are received by the policyholders in the form of income at a regular interval. Such incomes are enough to sustain and enjoy a peaceful lifestyle. Therefore, people must plan to invest in advance in annuities in order to fetch the benefits of receiving a stable income. With such incomes, the policyholders may pursue their hobbies and fulfil their life goals.

Financial Independence

An annuity plan offers financial independence to policyholders. They are not required to depend on loans or credits for their retirement. The annuity fetches considerable returns on the investment of the policyholder which shall be payable to them in the form of a stable income. Hence, it helps policyholders meet their daily expenses. In addition, it also helps them meet their major goals. The policyholder can be emancipated from any kind of apprehension or tension as the annuity scheme is likely to offer an adequate income at regular intervals.

Claim Process

The premium amount invested by a policyholder in an annuity plan keeps earning interest unless the policyholder or owner of the plan withdraws the sum. An annuity plan is not an insurance plan. Hence, the claim process in the annuity plan shall be different from an insurance plan.

  • The policyholder may choose a nominee who shall receive the amount in case of his death. Hence, in case of the demise of the owner of the plan, the nominee is expected to inform the insurance company about the same as soon as possible.
  • The nominee is also required to obtain the form and fill in the correct details.
  • Later, the form must be submitted to the insurance company in order to proceed with the claim process.
  • In the last step, the nominee is required to select the payment option. The nominee may either receive a lump sum amount or amount in installments. It is at the discretion of the nominee to choose the payment option and receive the amount.

Conclusion

The annuity schemes are the ideal plans to ensure a relaxing retirement. It offers various types of plans to the policyholders. The policyholder may decide among the payment options for the premium amount. They may also consider their age to pay the premium and receive a stable income.

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FAQs

Q. What are the documents an individual is required to possess in order to purchase an annuity plan?

A. An individual is required to possess many documents in order to purchase an annuity plan.

For age proof, an individual should have any one of the following documents.

  • Passport
  • High school mark sheet
  • Birth certificate

For ID proof, the policy buyer should have any one of the following documents.

  • PAN card
  • Voter ID card
  • Aadhaar card
  • Passport
  • Driving licence

For address proof, an individual must have any of the following documents.

  • Aadhaar card
  • Voter ID card
  • Driving license
  • Passport
  • Ration card
  • Utility bills

For income proof, an individual should have any of the following documents.

  • Bank statement
  • Copy of ITR returns
  • Salary Slip

In addition, the policy buyer should also have his medical reports. The medical reports are not pre-requisite to buy the annuity plan. However, some insurance companies may seek it from the buyer.

Q. What documents do a nominee should possess for the claim process?

A. The nominee should own the following documents for the claim process.

1. Claim form (should be filled in by the nominee with correct details)

2. Death certificate of the policyholder

3. ID proof of the policyholder and nominee. This includes any one of the following.

  • PAN card
  • Voter ID card
  • Aadhaar card
  • Passport
  • Driving licence

4. Any other document that an insurance company may seek.

Q. What are the differences between annuity and life insurance plans?

A. Here are the differences between annuity and life insurance plans.

Life Insurance Plan Annuity Plan
A life insurance plan offers the benefit of the investment to the nominee of the policyholder. It protects the family of the policyholder in his absence or case of his demise. The annuity plans offer a regular income to the policyholder at a fixed interval. It helps the policyholder meet financial needs during retirement
The life insurance plan is purchased to support the dependent in case of the demise of the policyholder. Hence, the primary objective of the plan is the death benefits The annuity plan is purchased in order to meet the financial needs during retirement. However, it also offers the death benefit to the nominee. Nevertheless, the death benefit is optional. The primary objective behind the annuity plan is to support retirement.
The payout which is likely to be received by the dependent in the life insurance plan cannot be deferred to a later period. The insurance company is mandated to pay the dependent upon verifying the death cause of the policyholder. The payout under the annuity plans can be deferred to a later period. The payout depends on the requirement of the policyholder. It is paid to him during the regular interval of time.

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