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Are Annuity Plans Worth The Investment?

Published On Dec 18, 2021 10:00 AM By InsuranceDekho

What does the term "annuity" mean? A respective person gets monthly payments or income from an insurance company through a long-term investment arrangement called an annuity. The payments might be made right away or at a later date by the concerned person. Individuals can choose to pay in monthly installments or in one lump fee.

Individual financial objectives are quantifiable and defined milestones that, when achieved, move a person closer to their desired future. Setting proper financial goals needs a high level of financial knowledge on the individual's behalf. As we all know, an annuity is a form of financial arrangement that provides a steady stream of income in the future from invested assets. As a result, for a certain amount of time or for the rest of their lives, the individual has a consistent source of income. To understand more on annuity, read on.

How Does An Annuity Work?

Annuities are intended to provide insured persons with a predictable source of income during their retirement years, reducing the risk of outliving their assets. If their present assets are insufficient to maintain their current standard of life, some people may choose to acquire an annuity contract from an insurance company or another financial institution.

Annuities are a good financial option for anyone looking for a steady, guaranteed income throughout retirement. Because the lump sum invested in the annuity is illiquid and susceptible to withdrawal penalties, this financial instrument is not suggested for younger people or those who require cash. Longevity risk is reduced by the fact that annuity holders cannot outlive their income supply.

Advantages Of Annuity

Following are some of the listed advantages of annuity -

  • Guaranteed Income

Regardless of how long the annuity owner lives, the insurance company is liable for providing the guaranteed income. That commitment, however, is only as good as the insurance provider that backs it up. This is one of the reasons why investors should only deal with insurers who have received excellent financial strength ratings from major independent rating organisations.

  • Personalized Features

Annuity contracts are frequently adaptable to meet the demands of the buyer. A death benefit clause, for example, can assure that the annuity owner's heirs receive at least something when the owner passes away.

Regardless of how well the mutual funds in a variable annuity perform, a guaranteed minimum income benefit rider guarantees a fixed payout. A surviving spouse can get income through a joint and survivor annuity. All of these amenities, however, come at an extra cost.

  • Money Management

For investors who would rather entrust money management to someone else, variable annuities may provide a number of professional money-management options, such as quarterly portfolio rebalancing.

Disadvantages Of Annuity

Following are some of the listed disadvantages of annuity -

  • High Commissions

When it comes to commissions paid on annuities vs. mutual funds, the former nearly invariably outnumber the latter. If the funds are placed in mutual funds, the financial adviser may receive a 2% commission. If it's put into an annuity that contains the same or comparable mutual funds, the adviser might earn a commission of 6% to 8% or possibly more. Many advisors, predictably, will steer their clients into an annuity.

  • High Fees

Annual maintenance and operating charges are generally much higher in annuity contracts than they are in comparable mutual funds. In recent years, this has begun to change, and several insurers are now offering annuities with lower yearly expenditure percentages. Investors should, as usual, read the fine print before signing anything.

  • Surrender Charges

If an annuity owner requires money out of the annuity before a specified amount of time has passed (usually six to eight years, but sometimes more), the insurer may demand high surrender costs.


If the insured person, commits suicide within 12 months of the policy starting date, their respective nominees or beneficiaries will receive 80% of the premiums paid until the day of their death, excluding, where applicable, taxes and extra premiums, provided the Policy is followed and the company does not pay an insured benefit to the respective nominees or beneficiaries.

Also read: Meaning Of Annuity

What Are The Benefits Of Investing In National Pension Scheme

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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