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Annuity Plans And Their Working Explained

Updated On Jan 17, 2022

An annuity is a contract between a person and life insurance that provides a regular income for life after retirement. In the case of an annuity, the investor makes a lump sum payment, which is subsequently invested by the life insurance company to pay back the earnings produced. An annuity, at its foundation, is a contract that allows you to prepare for a predictable income in the future, such as when you retire. In India, people buy annuities to plan for their retirement. You should also be aware that most individuals regard it as a type of insurance rather than an investment opportunity.
Individual financial objectives are quantifiable and defined milestones that, when reached, bring a person closer to their intended future. Setting suitable financial goals needs a high level of financial expertise on the individual's behalf. An annuity, as we all know, is a sort of insurance contract that guarantees to pay out invested assets in the future as a constant source of income. As a result, the individual will have a future source of income for a set period of time or for the rest of their lives. To understand more about annuity and its functioning, read on.

Annuity Plans And Their Working Explained

Types Of Annuities And Their Working

Following are the types of annuities and their functioning -

Fixed Annuities

So far, a delayed annuity has performed similarly to another type. The key difference is that there are two unique components. The accumulating period begins when you purchase the annuity. It comes to an end when you make your last payment. It is earning interest on a tax-deferred basis throughout this period. Just keep in mind that the manner in which this overflow manifests itself will differ depending on the annuity kind. You begin the payout phase when you get your first payment. You can pick between a lump sum payment and a series of fixed-amount payments. If you truly desire a series of payments, you can do so for a fixed period of time or for the rest of your life.

Deferred Annuities

If you want to buy an annuity, you must first decide whether you want to obtain an annuity right immediately, which is known as an instant annuity, or if you want to wait. You will get a delayed annuity if you pick the latter option. A delayed annuity is just a large investment.

You pay a lump payment or a series of installments to an annuity provider, who invests it on your behalf based on the strategy and type you choose. After the initial money has gained interest, you will be paid in installments.

Immediate Annuities

When you think of annuities, a quick annuity is most likely what comes to mind. There is also a solid reason for this. The most established type is prompt annuities, which may be traced back to Ancient Rome. Residents would make a one-time contribution to the annual, which is known in Latin as "annual" and means "yearly payments." As a result, they would get annual payments for the rest of their lives. This was the sole annuity choice until the 1950s.

What amount of money will be sent your way, and for what purpose? That is dependant on the duration or length that will be covered, as well as what you agreed to in the agreement. Simply understand that you can get payments for a set period of time, such as five or ten years, or for the rest of your life. You cannot, however, put this money aside.


Furthermore, you must seriously consider the annuity period. That simply means you want a set wage for a specific period of time or for the rest of your life. If you're in quite good health, you may need to make a decision about your future. In any scenario, you have the option of transferring the balance to a beneficiary. Another thing to keep in mind. The more established you are, the bigger your monthly income will be.

You may also like: Understanding Atal Pension Yojana Maturity Benefits

What Is A Pension Plan In India?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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