Life Annuity Plan

A retirement plan is an essential part of an individual’s financial planning for a safe and secure future against all market uncertainties. A continuous flow of income is the primary need to sustain a comfortable lifestyle. Instruments like Life Annuity plans help you build a significant corpus for your post-retirement needs.

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Let us understand Life Annuity in detail.

What is Life Annuity?

Life Annuity meaning can be understood as a periodic retirement corpus payout made to the policyholder until their death. These life annuity funds help the annuitant/ policyholder receive regular pension or supplementary income for their financial commitments post-retirement.

Types of Life Annuity Schemes

Life annuity pension plans come in different forms with their specific benefits and purpose. Let us learn some of them in the table below:

Types of Life Annuity Plans Details
Immediate Annuity Plans The annuity is bought with payment of a lump sum premium amount and immediately starts the pension payouts. The annuity payouts are made till the death of the annuitant.
Deferred Annuity Plans The premium payments are made over time and the annuity payout is made till the annuitant is alive.
Guaranteed Annuity Plans A guaranteed life annuity plan ensures making annuity payouts for at least a fixed number of years till the annuitant is alive. If he/she dies before the fixed period of annuity, then payouts are made till the beneficiary is alive.
Fixed Annuity Plans A type of life annuity, Fixed Annuity plans make pension payout in fixed amounts or else the payouts increase in a fixed proportion.
Variable Annuity Plans The annuity payouts in this plan vary as per the fluctuations in the underlying assets of the fund of a particular plan.
Joint Annuity Plans This is a life annuity plan, which makes pension payouts for joint life annuitants. Pension payout is made till the death of one or both the annuitants, as decided in the plan.
Impaired Annuity Plans The insurer increases the terms and benefits of the annuity plan if any life-threatening medical diagnosis is made.
Inflation-indexed Annuity Plans These annuity plans ensure to increase in the pension payout with a 2-6% rate every year to keep the purchasing power of your pension funds intact. Payout is not necessarily linked to the current inflation rates.

(Annual inflation growth generally ranges between 2-6%)

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Features of Life Annuity Plan

Let us look at the following features of life annuity plans:

  1. Offered by Insurance Companies

    Life annuity deposit schemes are generally offered by insurance companies but they are not necessarily insurance plans.

  2. Pay Premium Amount While Earning

    The annuitant/ policyholder pays a one-time premium or in instalments for a term period during their productive years to fulfil the conditions of a life annuity plan.

  3. Secure Pension Income

    The life annuity amount supplies continuous pension income during the retirement years.

  4. Premium Payment Types

    One can purchase annuity plans by paying the premiums in the following modes:

    Premium Payment Type Details
    Single Premium Lump-sum premium is paid once
    Regular Pay Premium is paid periodically till the time you retire
    Limited Pay Premium is paid for a fixed period only, which may not coincide with the time you decide to retire
  5. Premium Payment Frequency

    One can choose to periodically pay the annuity premium amounts with the following options:

    • Yearly

    • Half-yearly

    • Quarterly

    • Monthly

  6. Tax Exemption Benefits

    Section 80 C, 80 CCD, and 80 CCC of the Income Tax Act, 1961 allows for tax exemptions up to Rs. 1.5 lakhs for the maturity benefits from the annuity schemes.

How Does a Life Annuity Work?

Let us understand the working of a life annuity plan in the following ways:

  • Transferring Risk: The annuity plan shifts the risk of the policyholder living longer than his/her pension savings to the insurer.

  • Deferment Stage: The policyholder deposits lump sum or periodic premiums in their annuity fund.

  • Annuity Payout Stage: The insurer gives pension payouts to the annuitant or the beneficiary till he/she is alive.

  • Periodic Annuitization: The annuity payouts are made usually monthly, or as per the policyholder’s choice of quarterly, half-yearly, and yearly or lump sum payout.

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Benefits of Life Annuity Plans

The points mentioned below highlight the benefits of buying the best annuity plans in India for an investor:

  • Gives you a guaranteed income from the time you retire until your die

  • Gives you financial freedom even after your regular income stops after you retire

  • Enables you to cover your financial commitments of travelling, healthcare expenses, hobbies, and more even after you are retired

  • Offer you a range of pension plan options such as joint life and deferred annuity to choose from depending on your requirements.

  • Pension funds grow without paying taxes till your regular payout start

Points to Consider For Purchasing a Life Annuity Plan

The following points must be given special attention before buying life annuity products:

  • Start Investing Early: The earlier you start the bigger will be your pension fund size. Also, this will need you to make smaller amounts of periodic payments in your pension fund.

  • Consider Standard of Living: Decide on the annuity fund size as per your standard of living.

  • Analyse Financial Commitments: Plan the annuity payouts structured around your financial commitments in the future like loan repayments, marriage, and healthcare.

Bottom Line

Life annuity plans are the best plans for a guaranteed periodic income post-retirement. The caveat with this plan is that these plans are not inflation-indexed; lowering the purchasing power of your annuity funds by the time you retire. 

It is crucial before buying an annuity plan to judge the pros and cons as per their requirements before investing their life savings in a life annuity plan.

FAQ's

  • What is an annuity?

    An annuity is a financial product in which you make regular or lump sum payments and the insurer ensures a guaranteed payout from the time you choose to retire and up to a period selected by you or till death. 
  • When to Buy a Life Annuity Plan?

    It is advisable to buy a life annuity as early as you can. This will help you to build a huge annuity fund with small payments made regularly over a period.
  • Is a life annuity a good investment?

    Yes, a life annuity is considered a good investment plan if you desire to retire and still get regular income. This plan can serve as a financial backbone covering the daily expenses of your post-retirement period.
  • How long does a life annuity last?

    A life annuity scheme guarantees to make regular payouts to the annuitant till the time they are alive.
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