Retirement planning: What is an annuity plan? Who should invest in such plans?

Retirement planning involves choosing investment options to ensure a steady income after your service period. There are several options that offer retirement benefits and you can consider annuity plans as well. The annuity plans provide stable income during retirement years in the form of monthly pensions. You can purchase an annuity plan at any stage of your employment period or working years. Apart from National Pension System or Employees’ Pension Scheme (EPS), which offer pension benefits, you can choose any of the annuity plans offered by insurance companies.

Many insurance companies offer annuity plans which come with dual benefits of savings option and pension payouts. With such insurance plans you can opt for immediate annuity payment or to receive the amount after a waiting period of pre-fixed years.

However, many people are confused about how the annuity plan works and whether they should opt for it.  Here are a few factors you should know before opting for an annuity plan.

What is an annuity plan?

An annuity is an insurance product that involves a contract between the investor and the insurance company. In this, an individual is required to make a lump-sum investment, and in return, they receive periodic payments, either monthly, quarterly, or annually, in the future. Many insurers also offer annuity plans for which you can pay premiums at periodic intervals for the policy period.

Annuity plans are used as part of a retirement portfolio, providing a guaranteed income for a pre-decided number of years or whole life. Many insurance companies also offer annuity payouts to the nominee or spouse of the policy holder under certain policies.

The interest rates for annuity plans vary depending on its type.

What are the types of annuity plans?

The various types of annuity plans are:

1. Immediate Annuity: This is the most basic annuity plan as it requires the policyholder to invest a lump sum amount, which is then converted into monthly pensions after a per-determined waiting period. Most of the insurers offer annuity payouts just after one year of waiting period.

2. Life Annuity: In this type of annuity plan, the policy holder receives annuity payments until death. The payments can be in the form of monthly, quarterly, or annual instalments, depending on the choice of the individual.

3. Life Annuity with Return of Purchase Price: Under this plan, the policyholder receives annuity payments until death. After the demise of the policy holder, the amount initially paid for the annuity plan is returned to the nominee.

4. Guaranteed Period Annuity: This plan allows annuity payments to continue for a specified period, even after the policyholder's death. After the predetermined time is over, annuity payments cease.

5. Joint Life Annuity: Under this annuity plan, the policyholder's spouse continues to receive annuity payments for entire life after the policyholder's death.

6. Joint Life Annuity with Return of Purchase Price: This plan is similar to the joint life annuity, but the amount initially invested is returned to the nominee after the death of both the joint annuity beneficiaries.

Who should invest in annuity plans?

If you want to receive a regular income in your old age, you should opt for an annuity plan even if the returns are comparatively low compared to other investment options. This ensures you have a fixed income every month, eliminating financial worries. Moreover, you can opt to invest in joint annuity plans to ensure pension for your spouse as well.

 Annuity plans also help to mitigate the uncertainties or risks to some extent by providing insurance coverage and steady income in retirement years. If you have a large amount to invest you can choose an immediate annuity plan with lump sum investment.