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Sunday, 8 May 2016

Annuity Retirement Plans: Types and Benefits


Life is short but our career is even shorter. Hence, when planning for future it is always advisable to plan for your retirement as well. The earlier you start the better it is to plan your investment.
Annuity is a Financial Product offered by Insurance Companies, aimed at providing steady source of income to the Annuitants (Purchaser of Annuity Plans). The primary aim of such plan is to provide financial cover on retirement to the individuals, and ensure that one is able to sustain him/herself.
It is one of the retirement benefit plan which may be considered by Individuals who are looking at steady income plans post their retirement. There are primarily two types of Annuity Plans currently offered in India, namely:

Immediate Annuity Plan: The pension/income starts immediately on payment of lumpsum upfront. Annuitant may claim tax benefit on the lumpsum paid to purchase an annuity plan.

Deferred Annuity Plan: Annuitant pays regular premium or a single premium under the plan and the payout starts at a later date as per the terms and condition agreed by the Insurer and Insured. Tax Benefit is available on the Premium/Lumpsum paid towards the scheme.

Life Insurance Corporation of India (LICI) and many other private Insurance companies like ICICI Prudential, HDFC Life are offering Annuity plans and Individuals may chose a plan based on their needs. But before you do, please go through the types of Annuity Plans Insurer are offering and efficiency of the same.
There are various forms of Annuity Plans based on Benefits extended to Annuitants which is discussed below:-

Life Annuity Plans: Annuitant receives annuity payout at a fixed rate throughout the lifetime. However, on death of the Annuitant no benefit is extended to the spouse or the legal heir.
Life Annuity with Return of Purchase Price (ROP): Annuitant receives annuity payout at a fixed rate throughout the lifetime. On demise of the Annuitant, the investment/purchase price is returned to the nominee/legal heir.
Annuity Guaranteed for Fixed Tenure ( 5, 10, 15 or 20 years): Annuitant receives Fixed pension for a certain period of 5, 10, 15, 20 years.  In case of demise of annuitant during the tenure, an equivalent of pension is paid to the nominee for the remaining period.

Annuity Guaranteed for Fixed Tenure (5, 10, 15 or 20 years) and for Life thereafter: Annuitant receives Fixed pension for a certain period of 5, 10, 15, 20 years. If the annuitant survives the term, he/she continues to get the same pension till the end of his/her life. On death of the Annuitant the policy ceases and no benefit is extended to spouse or legal heir.

Life Annuity Increasing at a Certain Rate of Interest per annum: Annuitant receives annuity payout for lifetime increasing at a fixed simple rate of interest (mostly 3% or 5%) per annum throughout the lifetime. On death of the Annuitant the policy ceases and no benefit is extended to spouse or legal heir.
Life Annuity with Return of Balance Purchase Price: Annuitant receives annuity payout at a fixed rate throughout the lifetime. On death of the annuitant, the annuity payments will cease and nominee will receive the remaining balance of the purchase price i.e. purchase price less all annuity installments made prior to death. If Annuity paid exceeds or is equal to purchase price, then no payouts will be made.
Life Annuity with Joint Life, Last Survivor: Primary Annuitant (1st Holder) receives 100% of annuity at fixed rate through his/her lifetime. On demise of Primary Annuitant, Secondary Annuitant is paid the annuity amount (50% or 100% of annuity amount, as per the terms of the plan) at a fixed rate for life. On demise of the both the Annuitants the policy ceases and no benefits is extended to the legal heir.
Life Annuity with Joint Life, Last Survivor with Return of Purchase Price: Primary Annuitant (1st Holder) receives 100% of annuity at fixed rate through his/her lifetime. On demise of Primary Annuitant, Secondary Annuitant is paid the annuity amount (50% or 100% of annuity amount, as per the terms of the plan) at a fixed rate for life. On demise of both the Annuitant, the investment/purchase price is returned to the nominee/legal heir.
Life Annuity with Return of Purchase Price on Diagnosis of Critical Illness: Annuitant receives annuity payout at a fixed rate throughout the lifetime. Annuitant on being diagnosed with any of the specified illnesses covered under the plan or on death of the annuitant, whichever occurs earlier, the annuity payments will cease and the investment/purchase price will be returned to the Nominee/Legal Heir.
Are Annuity Plans Good for Investment?

All said and done, Annuity plans offer very low returns and are not a tax effective investment plan. As annuity payout received comes under the purview of income tax. To make matters worse, Service Tax further dent your returns. Infact, banks may offer attractive rate of returns as compared to those offered by the most of the Annuity plans. Whereas, Banks offer Fixed Deposits for a maximum tenure of 10 years so there is a reinvestment risk (lower rate of interest) involved.
However, the biggest advantage of Annuity Plan is that it is a long term contract and payout is fixed irrespective of the fluctuations in the interest rate. Thereby, making it a popular investment choice among the conservative investors.


I will try and do an indepth analysis of the Annuity Plans in my next post. 

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