Annuity Plans

What Are Annuity Plans?

An annuity plan is a financial product that provides regular income to an individual over a set period, usually during retirement. It's a contract between you and an insurance company, where you agree to make a lump-sum payment or a series of payments, and in return, they promise to give you guaranteed payments at regular intervals.

You can choose from different types of annuity plans based on your needs. There are immediate and deferred annuities, with options for fixed or variable returns. Annuity plans are a useful tool for retirement planning because they provide a steady income to cover your expenses once you stop working. They also help reduce the risk of outliving your savings, as you can receive income for the rest of your life.

Though annuities can seem complicated, many people prefer choosing a retirement plan that better suits their needs. In this guide, we’ll explain annuities and help you understand how they can support you during retirement.

Why do I need an Annuity Plan?

An annuity plan is a retirement-focused financial scheme that gives you a guaranteed income stream for life in return for a lump sum or regular payments. It is meant to support you financially after your regular salary stops.
 

After retirement, while living expenses such as groceries, healthcare, and utility bills continue, your income usually does not. That is when an annuity plan comes in handy; it serves as a replacement for your paycheck, providing steady cash flow to support your lifestyle.
 

One of the greatest fears at the time of retirement is longevity risk, the possibility of outliving your savings. Annuity schemes mitigate this risk by providing lifetime or fixed-term payments, cutting the risk of being dependent on others financially.
 

Also, certain annuity plans provide inflation-indexed returns that enable your income to increase with rising prices over time. By locking into periodic payments, annuity plans act as a secure and stable financial cushion in your golden years.
 

For example, Ravi, a 60-year-old retiree, puts in ₹10 lakhs in an annuity plan. In turn, he starts to receive ₹6,000 per month for life. This comes in handy to help him meet common expenses such as groceries, medicines, and electricity bills, even if he no longer receives a salary.
 

## Please note that these are illustrative figures and the values may change as per the return and market fluctuations.

How Does Annuity Work?

Annuities provide a guaranteed stream of income after retirement. These plans help you accumulate money for the future, typically once you retire. You can make a series of payments or a lump-sum payment to an insurance company to purchase an annuity. The company invests the money you provide on your behalf to build up a corpus for the future. When you buy an annuity, you select how frequently you want to receive payments, the amount, and for how many years you should receive them. Most annuity plans today provide life-long payments. When you want to start receiving payments, you will get the original investment plus interest minus fees the company requires to manage the plan for you. You can categorise annuities into fixed and variable annuities. Fixed annuities provide a fixed rate of return. Variable annuities invest in a portfolio of stocks, bonds, and mutual funds, and the returns depend on the performance of the underlying investments.
 

Understanding how annuity works is vital before making any investment decisions. An illustration is used to demonstrate the concept below:
 

Maria, a 50 years old entrepreneur, is nearing retirement and wants to ensure a steady stream of income after she steps down from her business. To address this, she invests Rs. 30 lakh in a deferred annuity plan contributing Rs. 5 lakh annually for 6 years. This annuity plan will accumulate interest on her investment over the next 10 years. Upon reaching her retirement age of 60, the current annuity rates will be locked in. At that point, Maria can expect to receive a regular income of approximately Rs. 3 lakh to Rs. 3.50 lakh per year for the rest of her life.

What are the eligibility criteria for an Annuity Plan?

To avail of an best annuity plans, certain eligibility criteria must be met. These criteria may vary depending on the type of annuity plan and the insurance company. Here are some common factors considered:
 

• Entry Age: This type of policy is generally available to individuals between the ages of 20 and 60 years. 
• Policy Term: You can choose a policy term that fits your needs, ranging from a minimum of 5 years to a maximum of 35 years.
• Sum Assured: The sum assured is the guaranteed payout amount you select when purchasing the policy. It offers flexibility, with a minimum threshold of Rs. 1 lakh and no upper limit. This allows you to tailor the coverage to your financial goals.
• Monthly Pension Amount: The policy offers a monthly pension benefit upon maturity. You can choose a monthly payout amount that aligns with your retirement income needs.