Annuity Plan: In the current era, when interest rates on fixed deposits are falling, raising a fixed income to live a good life after retirement has become extremely challenging. In such a situation, buying annuity from life insurance companies can be a solution which can become a means of regular cash flow after retirement. After all, what is annuity and how it can be helpful after retirement. Know everything about this here… ..
What is annuity?
An annuity is a guaranteed amount paid for a subscriber’s life time. Insurers are offering several types of annuity plans, such as pension for life, pension to spouse or spouse when the death of the annuity buyer, yet there is a provision to surrender the policy in case of need of money in an emergency Is not. There are options where the corpus is returned to the legal heir of the investor after the death of the plan taker, but it reduces the effective return.
Who is better for whom?
An annuity plan is a better option for those investors who do not want to invest their accumulated capital in equity related instruments. That means those who do not take the risk of the market. B Srinivas, product head of ICICI Prudential Life Insurance Company, says that annuity products by life insurance companies are ideal keeping in mind the post-retirement needs. They are not sensitive to market fluctuations or any change in interest rates. This does not affect them. Annuity products provide guaranteed income for the entire life of the policyholder so that they can remain financially independent in their golden years.
Sanjay Tiwari, director, strategy, Exide Life Insurance, says that it is important to decide on savings plans so that funds can be raised. Which should be converted to annuity at a later stage. Life insurance is an option that provides double protection. In the Accumulation phase, if the investor dies due to any reason, the lump sum is paid to the family, which will be 10 times the annual premium. This tax free fund can also be converted into annuity as per the choice of the customer. If the investor stays in the Accumulation phase, then he can take advantage of his lifetime income by converting the maturity amount into annuity.
2 types of annuity
Life insurers offer 2 types of annuity plans – Deferred and Immediate. In an intermediate annuity plan, the investor pays a lump sum to get pension at regular intervals like monthly, quarterly, half-yearly. It is better for those who have received funds from gratuity or Employees Provident Fund after retirement or have a corpus. In a deferred annuity plan, an investor invests in a pension scheme, deposits the money with the insurance company and then receives pension or regular payment after retirement. Deferred annuity also offers the customer the option of withdrawing one-third of corpus tax as a lump sum and converting the remaining two-thirds to annuity.
When to choose which plan
Srinivas says that a deferred annuity plan is better if one is in the late 40s or early 50s, whereas if one is close to retirement then an intermediate annuity plan is the best option for that.
At the same time, according to Sanjay Tiwari, with the beginning of the age of 20, investment should start for retirement. If you want to invest at a young age then you can consider a deferred annuity plan. However, if one is not able to save regularly at a young age, then he should choose an intermediate annuity plan.
Short-term interest rates are higher than long-term rates, so it becomes challenging for insurers to pay higher interest rates for annuity. Because they are long term payments. Long term bonds are not always available in the market, so insurers have to risk reinvesting at low rates. As a result, annuity pricing becomes high and many investors are not attractive towards the current annuity rates.