What is Annuity?
Published On Jun 11, 2021
An annuity is an agreement that provides payouts to the policyholder of a scheme such as a pension plan, retirement plan, or ULIP. Basically, the most common type of annuity in India is present in the case of pension plans, as they function as an agreement that ensures payouts to the policyholder at a future time such as after retirement. In India, the purchase of annuities is one of the most common methods of planning for retirement expenditures.
Types Of Annuity
The different types of annuity available are as follows-
1. Lump Sum Annuity: Even though the most basic type of annuity plan features regular payouts after a fixed period of time, some annuity plans in the market provide an option of providing the payout as a lump sum. However, in most cases, the entire retirement benefit is not allowed to be obtained as a lump sum.
2. Periodic Annuity: Periodic annuity is designed to provide the policyholder with payouts at regular intervals of time. Such intervals can be in a monthly, quarterly, or yearly manner similar to the term and conditions of pension plans. Alternatively, it can also be paid out in an organized manner at regular intervals such as at the end of the 2nd year, 4th year, 6th year, and so on irrespective of premium payments made or not.
3. Immediate Annuity: This kind of annuity provides the payment of the lump-sum amount as a premium in order to be a policyholder to the scheme. If this lump sum payment is made, annuity payouts to the policyholder start immediately as per the available payout conditions.
4. Deferred Annuity: Deferred annuity payouts offer an interval between the time premium payments and the annuity payouts. The period during which the policyholder makes premium payments is referred to as the accumulation phase of the policy. After the completion of the accumulation phase, the accrued amount is used for making the purchase of annuities which provides the future payouts to the policyholders.
5. Fixed Annuity: In case an individual purchases a fixed annuity plan, the annuity payouts will remain constant over the entire payout period. Commonly, the fixed annuity plan is a relatively conservative option as they are usually invested in fixed-income investment options. Hence there is potentially less growth of the principal amount invested over the accumulation phase of the annuity plan. However, in various ways, a fixed annuity is more preferred as a pension payout because this system guarantees fixed income to the individual during the post-retirement phase.
7. Variable Annuity: The variable annuity is also known as participating plans which feature variations in the annuity payouts between one payout and the following payouts. This variation is in the major parts linked to the market performance of the investments made by the pension fund. In case good returns are yielded by the company while managing the policy, the annuity payouts will be higher otherwise the annuity payouts will be lower. At present, one of the best examples of a variable annuity investment is the NPS scheme, which is a market-linked investment option, which does not provide assured returns or payouts unlike the earlier traditional systems of central and state government pensions which are slowly being phased out of the market.
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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.