What is Annuity Plan and How Does it Work? Types of Plans

An annuity is an insurance product that offers you a steady income post-retirement, in return of a lumpsum payment made to the insurance provider. This regular income can either be throughout your life or for a specified period of time. Typically, an annuity plan features in one’s retirement portfolio.

Depending upon when you get the payouts, an annuity plan can be categorised into:

• Accumulation phase: This phase is marked by accumulating funds and commences from the date you pay a premium for the first time.
• Vesting phase: This commences on the day you start receiving regular payouts in the form of pension.

• Immediate annuity Here, you start receiving a steady income once you pay your insurer a lump sum, rather than a series of premiums over a period of time. In a nutshell, immediate annuities don’t involve an accumulation or a vesting phase. Typically, individuals nearing retirement prefer this kind of an annuity, considering he/she can start receiving regular payouts right away.
• Deferred annuity With these, you will require to accumulate a corpus while the annuity begins after a particular date. This can further be divided into:

Stated below are the workings of different annuity plans:

• Life annuity Here, you will receive regular payouts (can be monthly, quarterly or yearly) over the course of your life.
• Life annuity with return of purchase price It is similar to a life annuity plan wherein you get a periodic income throughout your life. On your demise, the insurance provider reimburses the initial investment (used to buy the annuity) to your nominee. You can consider this avenue should you want to pass down a legacy to your successor.
• Guaranteed annuity Here, you will continue receiving a regular income for a defined period (say 5, 10 or 15 years). In case of your demise, your nominee would start receiving the same. Annuities will stop only upon completion of the predefined (guarantee) period or the annuitant’s demise, whichever falls later.
• Joint life annuity In this case, you will keep enjoying policy benefits throughout your or your spouse’s lifetime.
• Joint life annuity with return of purchase price It is similar to a joint life annuity plan, except that upon demise of you and your spouse, your nominee would be entitled to the original investment used to purchase the annuity plan.

In conclusion There are special conditions governing withdrawal of money from an annuity. While some annuity plans will allow you to withdraw upon being diagnosed with a particular critical illness, few will reimburse the original investment (in whole or partially) to your nominee upon your demise.More importantly, immediate annuity plans are a great avenue when it comes to being financially independent, particularly for senior citizens who wish to live their lives with a periodic and stable income coupled with the freedom to fulfil various life goals.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.