Annuity - Definition & Meaning

An annuity is a contract between the policyholder and the insurance company, wherein the policyholder needs to make either lump-sum payment or pay in installments to receive regular income as an annuity after retirement. The annuities can be paid either immediately after payment of the lump-sum amount or after completion of the specific tenure. 

In India, the simplest form annuity occurs in case of a pension plan, which implies that payouts will be given in the prospective times such as after the retirement. The buying of annuities in India is common when it comes to financial planning for retirement.

What are the Different Types of Annuities?

There are six different types of annuity options offered by the life insurance and pension plan. Let’s take a look at it

1. Immediate Annuity

In this type of annuity plan, there is no accumulation phase offered by the policy. The immediate annuity plan starts offering the benefits right from the vesting age. In the immediate annuity plan, the policyholder needs to pay a lump-sum amount to the insurer
and the payment of annuity starts immediately entire for a lifetime or a limited tenure.

2. Deferred Annuity

These retirement plans are pension plan that offers annuity after the completion of the accumulation period. Deferred annuity plans are divided into two sections i.e.

  • Accumulation Phase- This is the period when the policyholder starts investing in the plan by paying premium from the date of policy initiation to accumulate a retirement fund for the future. 
  • Vesting Period- It is the period from which the insurance holder starts receiving the policy benefits as regular annuity or pension.

3. Periodic Annuity

Well periodic annuity essentially provides the funds to the annuitant at the regular point in time. This is more similar to the system of a pension plan wherein the intervals could be based on every month. Besides, the payments could also be done in a phased manner from time to time towards the end of 5th, 10th and 15th years even though payments of the premiums have been earlier done or not.

4. Lumpsum Annuity:

Even though the most widely recognized kind of retirement plan highlights standard payments after a predetermined period, some annuity plans do give the alternative of giving a single amount payout. Such a singular amount payout is normally discretionary and accessible just at a specific period. In any case, by and large, the whole retirement advantage can't be gotten as a single amount. For instance, on account of NPS 40% of the aggregate sum accumulated should be compulsorily used for annuity buy and can't be pulled back as a single amount.

5. Variable Annuity:

The variable annuity likewise named as taking interest plans include varieties in the annuity payments between one payout and the following. This variety is in significant part connected to the market execution of the speculations made by the benefits store or annuity plan that the individual has put resources into. If great returns are gotten by the organization dealing with the plan, payments will be higher in any case the annuity payments will be lower. Because of being market-connected, such plans can't give ensured results which makes them a similarly hazardous suggestion for a few retired people or planned supporters. At present, perhaps the best case of a variable annuity venture is the NPS conspire, which is market-connected speculation, doesn't give guaranteed returns or payouts, not at all like the previous frameworks of focal and state government benefits, which are gradually being eliminated.

6. Fixed Annuity:

On the off chance that individual pursues a fixed annuity plan, the payments will stay consistent over the whole time frame during which the payments happen. In like manner practice, the fixed plan is a moderate preservationist choice as they are generally put resources into fixed pay instruments. Thus there is possibly little development of the chief sum contributed over the amassing period of the annuity plan. In any case, from numerous points of view, a fixed annuity is ideal as a benefits payout because this framework ensures pay to the person during the years of post-retirement.

What are the Benefits of Investing in Annuities?

Now, that we duly understand the types of annuity meaning, it is time to have a quick overview of the following benefits of investing in annuities:

No Cap of Investment:

When there are investment caps upon POMIS and Senior Citizens Savings Scheme there is no such investment cap when it comes to an annuity.

Removes the Risk of Reinvestment:

Probably the greatest favourable position that annuities offer is that they dispose of reinvestment chance. Since in India we are moving towards lower financing costs, the hazard is that when you go to reinvest the head, you may get a lower pace of premium. Momentary instruments like the Post Office Monthly Income Scheme (POMIS) convey reinvestment chance. In any case, when you put resources into an annuity, you are ensured a similar pace of payout forever.

Sense of Safety:

An annuity gives you the affirmation that you will keep on accepting cash every month for a mind-blowing remainder. The insurance agency assumes the danger of making sense of how to bring in the cash keep going as long as you live so you don't need to stress over it. Pick your installment recurrence. You may decide to get your fixed payouts at stretches that suit you best - month to month, quarterly, half-yearly or yearly.

Why Should You Invest in an Annuity?

On the off chance that quite possibly a speculator may confront a reserve shortage during retirement, or he may need to make a huge, startling use, at that point he may fall into difficulty if he has tied up his advantages in an annuity.

Be that as it may, there could be another financial specialist who has amassed an enormous enough corpus with the goal that he is probably not going to confront a shortfall. For such a speculator an annuity is a smart thought as a result of the made sure about installment stream that it gives.

How does Annuity Work?

Now that we know what is annuities, let’s take a look at how does an annuity work?

  • To receive an annuity, the individual needs to invest either as a lump-sum or in installments to the annuity plan.   
  • The payout is paid to the annuitant on a series of dates or future dates. The income can be paid as monthly, annually, quarterly, or as a lump-sum payment.
  • The payout is determined based on various factors including the annuity tenure.
  • The individual can choose to receive the annuity payouts for a specific tenure of time or a monthly payment for the rest of the life.
  • The annuity amount depends on whether the individual has opted for a guaranteed payout (fixed annuity) or payouts determined by the performance.

What is an Annuity Calculator?

Annuities are bought by the retirement subsidize or other applicable administration body contingent upon winning economic situations. Be that as it may, as future economic situations can't be anticipated with any level of conviction, a particular calculator is required to give gauges.

This is profoundly called the annuity calculator is intended to assist speculators with assessing the amount they have to contribute during the amassing time of the benefits intended to arrive at the ideal corpus toward the finish of their venture residency. As the payout is only utilized by benefits plans and assets, a few organizations additionally term it as the retirement arranging and pension plan calculator.

Understanding Annuity and Taxation

Everything great accompanies has a drawback thus do annuities. Annuity rates are not extremely straightforward or simple to follow. Simply the way protection premiums change across back up plans for a similar measure of spread and residency does as well; annuity. The rates across guarantors shift, and it might be a smart thought to look for offers before focusing down.

In like manner, the treatment of tax on annuities additionally should be calculated. There is no assessment motivation with annuities, as the annuity that one got is treated as pay and burdened by the chunk rate that one falls in. Be that as it may, as there is a minimal decision for NPS supporters at the hour of development, they need to pick an annuity with 40% of the corpus at the hour of reclamation.

Without appropriate other options, an annuity accomplishes work for individuals searching for a fixed and customary salary in retirement. The anticipated income fills the need for some, and they can utilize their different reserve funds and speculations to counter increasing costs and different components affecting their average cost for basic items. Your target when taking an annuity ought to be to accomplish pay security over the long haul instead of the development of the head. On the off chance that a fixed salary is your need in retirement, an annuity could be the item to rely upon.

FAQs

  • Q: Is there an age limit for annuities?

    Ans: Yes, there are age limits for annuities, it generally varies from plan to plan.
  • Q: When can I withdraw my money from the annuity?

    Ans: You can withdraw your money from the annuity under the specific conditions. Firstly, the pre-withdrawal of the annuity is allowed in case the insured person is diagnosed with any type of critical illness. Secondly, in the event of the unfortunate demise of the annuitant during the policy term the whole amount or a part of the original purchase is returned to the beneficiary of the policy by some of the insurers.
  • Q: Are annuities are profitable for senior citizens?

    Ans: Yes, be it immediate annuity or deferred annuity, it gives financial independence to the individual after they cross the age of 60 years. In case of a deferred annuity, one can create a financial retirement corpus for the future whereas the immediate annuity plan helps to deal with the emergencies. Annuities help the senior citizen to live a financially stable and stress-free life after retirement.
  • Q: What happens to the annuity if I die?

    Ans: The chance of an annuity payout after the insured demise entirely depends on the choice exercised by the policyholder while purchasing the policy. In case of a life annuity, no amount is paid to the beneficiary of the policy and the entire annuity amount stays with the insurance company. However, in the case of a joint annuity, the amount is paid to the other joint member of the policy.
  • Q: What is the best age to buy an annuity?

    Ans: As per the financial experts, the best age to purchase the annuity is between 45-55 years. However, in the case of a deferred annuity, it differs from plan to plan.
  • Q: Do annuities pay monthly?

    Ans: Yes, annuities can be paid monthly.

    Read More : Present Value of Annuity | Future Value of Annuity | Best Annuity Plans

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