Given the current economic scenario in the backdrop of the ongoing public health crises globally, investing your hard-earned money in a suitable Annuity Product may be the answer to your queries.
The ongoing COVID-19 pandemic is driving many Indians — whether they are approaching their retirement age or just starting out in their career — anxious about their finances, and retirement plans. This is the reason why more and more people are increasingly considering lifetime income products that are less vulnerable to factors like market volatility, retirement longevity, and challenges created by cognitive decline in order to secure their retirement income.
However, before anything else, it is important to understand how to balance the uncertainty about the financial futures amid a pandemic, concerns about outside forces impacting the retirement plans, and choosing the right lifetime income products to enjoy financial security during the sunset years. Not to forget, safety, liquidity and inflation-adjusted returns are key parameters you should consider while selecting instruments for your retirement kitty.
Given the current economic scenario in the backdrop of the ongoing public health crises globally, investing your hard-earned money in a suitable Annuity Product may be the answer to your queries. After all, annuity products are specifically designed to meet long-term retirement needs. An annuity plan is a product offered by life insurance companies that give you fixed cash flow and primarily serve as an income source for retired people. However, before taking a look at further details, it is first important to understand the product itself.
What are Annuity Plans?
Annuity plans offer you a guaranteed income either for life or for a stipulated duration. They are specifically designed to protect an individual against the risk that he may outlive his own resources. Instead this risk is borne by the insurance company. Basically, annuity plans work like the reverse of a typical pure protection plan i.e. term life insurance. Under a term insurance plan, you pay the premiums until the policy tenure and the dependents get the total sum assured as death benefit under the policy in case the life insured dies within the policy period.
However, under an annuity plan, you pay either a lump sum or regular instalments in the accumulation period and get regular payments as long as you are alive or for a pre-specified fixed time period. While term life insurance covers the financial risk of ‘unexpected death’ leaving the family destitute, annuity plans cover the financial risk of living without adequate money post retirement. The size of your payments are determined by a variety of factors, including the length of your payment period.
Types of Annuity Plans
Depending on when you buy them, annuity plans can be divided into two categories: Deferred Annuity and Immediate Annuity. An immediate annuity refers to an annuity plan for which you pay a lump sum amount, rather than a number of instalments over the time. The plan then pays you a regular guaranteed payout. An immediate annuity plan is mostly purchased by individuals who are about to retire and would like to receive a monthly income right away.
On the other hand, in deferred annuity plans, you pay premiums and build a corpus until a specified time period and then, you buy an annuity, which would give you fixed periodic payments post specified period. The investor holds the option to encash 60 per cent of this corpus fund upon arriving at the vesting age or the vesting date. The other 40 per cent of the fund is used for the purchase of annuity. Within these two categories, annuities can also be either fixed or variable depending on whether the payout is a fixed sum, tied to the performance of the overall market or group of investments, or a combination of the two.
Advantages of Annuity Plans Over Other Retirement Products
First, annuity plans, both – immediate and deferred – provide you with the assurance that you will continue to receive money each month for the rest of your life. The insurance company takes on the risk of figuring out how to make the money last as long as you live. Though it is important to choose your payment frequency wisely as you may choose to receive your fixed pay outs at intervals that suit you best – monthly, quarterly, half-yearly or annual. Second, annuity plans eliminate reinvestment risk. Since we are structurally moving towards lower interest rates, when you go to reinvest the principal, you may get a lower rate of interest. However, by investing in annuity plan – immediate annuity policies specifically – you are guaranteed the same rate of payout for your entire life. Third, while there are investment caps in many other retirement plans, there are no such investment caps/limit on annuity plans.
Investing in The Right Annuity Plan
Like any other financial product, the key parameters for selecting the right annuity plans are safety, returns, and liquidity. Though, the least one must do while investing in an annuity plan is look at the past track record of the annuity provider and not get carried away by the product features or promotions. Industry track record, returns provided on past annuities and the current financial strength of the company are some of the key factors to be considered before investing in any annuity product.
(By Vivek Jain, Head-Investments, Policybazaar.com)