Decoding Insurance

What are the best retirement options for better returns?

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The two most crucial things one needs after retirement are first, the affection and support of your loved ones, and second, a stable regular income as a replacement for a salary to cover everyday costs without relying on others. Further, post-retirement, maintaining the same lifestyle that you had while working can be an issue for some people. Thus, to maintain those living standards and secure your future, building a retirement portfolio with a mix of regular monthly income and enough corpus to cover unexpected financial expenditures is essential. 

Taking this into consideration, having the right financial instrument to invest in would be a planned thought to safeguard your future. Your plan should ideally provide you with monthly income post-retirement, additionally, it should cover unexpected emergency expenses as well. However, many people still believe investing in FDs will offer them secured returns. But, considering the past performance, when interest rates on these investment options are dropping every year, currently these plans offer 5% to 6% of returns. Which isn’t enough to build the required corpse for your retirement. Further, in the coming years, these interest rates are likely to drop by another 3–5%. Thus, choosing a plan which would fulfill all your requirements can be a daunting task.  

People in their golden years want guaranteed income, and this is where Annuity Plans come to the rescue, which brings exclusive features and benefits to the customer.  

Annuity plans to the rescue

With a GDP growth rate of 9%, India is currently the world's fastest-growing major economy. Making it an investment hotspot for investors. Moreover, India has the seventh largest GDP, which is  better than most developed nations. Given that, investing your hard-earned money in an appropriate Annuity Plan is the way to go if you've already retired or plan to retire soon and want a regular and guaranteed income in your golden years. An annuity plan requires you to pay a lump sum during the accumulation period, then post your retirement you receive regular payments for the rest of your life or a pre-decided fixed period. Annuity plans are meant to address long-term retirement needs and fulfill unexpected expenses in case of an emergency. Additionally, an annuity plan allows you to lock in the current interest rate for the rest of your life. 

For instance, if you are a 50-year-old man who purchased an annuity plan with a yearly payout of 6%. Later, if the rate of interest drops to 2–3% after a decade, you will still receive payment at a 6% interest rate for the remainder of your policy term - the one you invested in. Furthermore, annuity plans are a great approach to reduce longevity risk because they provide a guaranteed income for the rest of your life/until the end of your policy term.

Types of Annuity Plans 

Immediate Annuity Plans and Deferred Annuity Plans are the two types of Annuity Plans available. These are categorized based on when they are being purchased.

Immediate annuity plans

Immediate annuity plans are considered as one of the most popular annuity options. In these plans, you make a one-time investment and post that the insurer starts to provide you with monthly payments in exchange, which will act as an income replacement tool. Annuities can either be fixed or variable based on whether the payout is a fixed sum, tied to the performance of the market or is a group of investments, or a combination of the two. This plan is suitable for people who are about to embark upon retirement. 

1. Joint Life Annuity with the Return of Purchase Price

Under the Joint life annuity with return of purchase price, the policyholder gets the fixed annuity for life on the amount invested. Further, when a customer dies, his or her spouse begins to receive the pension. This pension is active till the spouse passes away. In addition to that, if the spouse also dies, the nominee/children receive the entire amount which was originally invested as a lump sum. This would be the best annuity option for those who wish to safeguard their loved ones even in their absence. However, it should be noted that the pension received under this plan is lower than that of other options.

2. Joint Life Annuity without the Return of Purchase Price

One must go for the joint-life annuity option to ensure that your spouse is supported by annuity proceeds even if you are not present to support them financially. This type of annuity plan continues to pay until you or your spouse's unfortunate death. The purchase price, however, is not returned to the nominee or dependents. The monthly pension received by the customer and his or her spouse is higher under this plan.

3. Life Annuity with an Annual Increase

This option gives you an annuity for the rest of your life, with the annuity payout increasing at a basic rate that fluctuates depending on the customer's needs. Throughout the customer’s life, the annuity grows with each complete insurance year.  The idea is that, while it may not be linked to the actual inflation rate, it will cover the increase in expenses to some extent.

4. Life Annuity with Return of Purchase Price on Critical illness (CI) or Permanent Disability Due to Accident (PD) or Death

Under this, the customer gets the annuity  until the first occurrence of any of the specified critical Illnesses until you reach the age of 80, or until you die. Furthermore, in the event of the first incidence of any of the mentioned critical illness or permanent disability before the age of 80 years, or death, the Purchase Price is reimbursed to the nominee. 

Deferred Annuity

Another category is  deferred annuity, here you are required to build a corpus, either by paying monthly or till a specified period, this accumulated amount is later used to purchase an annuity. Once you retire, you start receiving periodic monthly payments as a pension. Further, the customer doesn’t necessarily have to invest the entire corpus into the annuity, which means that 1/3rd of the corpus is tax-free, if the customer wishes to withdraw. However, the remaining 2/3rd of the amount has to go in the compulsory annuity.  This is a one-time investment you are supposed to make and the customer can also lock in the current rate of interest without worrying about the drop-in rate of interest a few years later. 

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