What is annuity and what does it signify?

Retirement can be peaceful, yet the most challenging phases of your life. While you might crave the comfortable lifestyle after retirement, you might worry about your finances since the flow of your professional income stops. Since your finances can be a major concern after retirement, you should start your retirement early. Retirement planning can be a balance between your savings and investments that can help you live the desired life in future.

Although you might feel that savings can be enough, you might end up using it in the case of an unannounced contingency such as medical emergency, critical illness, and so forth. Therefore, you should buy a pension plan that can meet your routine needs after retirement. Although there are different pension plans such as a traditional retirement policy, National Pension Scheme (NPS), and so on, you should choose an annuity plan for your retirement.

Before you select an annuity plan, let’s first understand the meaning of annuity plan in detail for better clarity:

Unlike insurance products, an annuity plan might not offer you with life coverage. An annuity plan can usually provide you with a guaranteed income either throughout your life or for a stipulated duration. To receive a regular flow of income after retirement from the annuity plan, you should first invest a lump-sum amount. When you make the lump-sum payment, your insurance company would invest the lump-sum amount and provide you with the generated returns on your investment. Use a retirement calculator to know more.

Under annuity plans, you should carefully select the right type based on your financial needs. Therefore, let’s go through the top two types of annuity plans mentioned below to make informed decisions in the future:

1.Immediate annuity plan

The working of an immediate annuity plan can start after reaching the vesting age. Typically, you might receive annuities either for a limited period or a whole lifetime. Under an immediate annuity plan, there might not be any accumulation phase.

2. Deferred annuity plan

A deferred annuity plan can be a retirement policy, which can provide an annuity after a specific duration. Typically, these deferred annuity plans are usually divided into two phases, which are as following:

3. Accumulation phase

Initially, you should invest your hard-earned savings and accumulate enough cash from the date of your first premium payment.

4. Vesting phase

After you reach the vesting age, your insurer can offer you with the retirement benefits that can act as your pension.

Although an annuity plan can guarantee you a fixed rate of income, its working can depend on the various types. Apart from an immediate and deferred annuity plan, there are different types of annuities. Therefore, let’s learn the available annuities types and the working of each annuity plan, as mentioned below:

  • Life annuity

5. Regular life annuity

You are eligible to receive regular annuity payout until the time you are alive. A regular life annuity plan can lapse after your demise.

6. Life annuity with return of purchase price

Typically, you can receive the payout until and unless you are alive. After your death, your insurer can return the initial amount that was paid at the time of purchase by you to your nominees.

  • Joint life annuity

7. Joint life survivor annuity

As a nominee, you might receive the annuity payout in the absence of your spouse.

8. Joint life annuity with return of purchase price

If both the parties, you and your spouse pass away, your nominees can be eligible to obtain the initial investment amount.

  • Inflation-indexed annuity

After every year, there can be a rise in the total annuity rate, which can increase between 2%-5%. Although it might not be linked to the inflation rate, it can manage the increase in your expenses due to the rapid growth of inflation.

  • Annuity payable for a guaranteed period

As the name suggests, you can receive an annuity for a guaranteed duration such as 5, 10, or 15 years. However, the flow of annuity can stop either after the completion of a guaranteed period or on your death.

To sum up, an annuity plan should be a part of your retirement portfolio. The primary objective of annuity plans can be to prevent you from outliving your retirement savings. Therefore, you should select the right annuity based on your financial requirements and post-retirement goals such as traveling, pursuing an interesting hobby, starting a new venture, and so forth.