What is Annuity: Meaning and Definition
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Updated date : 20 May 2020
What is an Annuity?
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.
What are the different types of annuities?
There are generally two different types of annuity options offered by the life insurance pension plan. Let’s take a look at it
1. Immediate Annuity
In the immediate 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
Deferred annuity 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.
How does Annuity work?
Now that we know what is an annuity and what is annuity meaning, 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 annuity is paid to the individual on a series of dates or future dates. The income can be paid as monthly, annually, quarterly, or as a lump-sum payment.
- The annuity payout is determined on basis of 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 of the annuity’s underlying.
Q1. Is there an age limit for annuities?
Ans- Yes, there are age limits for annuities, it generally varies from plan to plan.
Q2. 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 insured person during the policy term the whole annuity amount or a part of the original purchase is returned to the beneficiary of the policy by some of the insurers.
Q3. 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.
Q4. 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 annuity 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 annuity amount is paid to the other joint member of the policy.
Q5. 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.
Q6. Do annuities pay monthly?
Ans- Yes, annuities can be paid monthly.
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