Annuity or Pension plans provide financial support to an individual when he/she reaches at a stage of life; in which he/she cannot do work to cover his/her basic living expenses. After retirement, everyone wants a regular income source; that’s why, many employers set up occupational pension schemes for their employees to provide a regular income source to them. It is immensely important for individuals (whose employers do not provide occupational pension schemes) to plan for post-retirement expenses to live a hassle free life after retirement.
Types of Pension Plans in Insurance Marketplace in India
Annuity/Pensions plans and Life insurance plans are totally different concepts. Life insurance plans provide protection against specified event of losses for example; in case of death of insured, nominee receives death benefits, whereas, in annuity plans annuitants receive regular income on monthly, quarterly, half-yearly or yearly basis. Though, buying an annuity plan is very much essential for an individual but without knowing “which annuity plan should you buy?” can put you or your loved ones in trouble for example; if you have a spouse and you have bought life annuity plan (in which annuity ceases in case annuitant dies) then your spouse may face financial problems upon your death because he/she cannot receive annuity benefits. Here are different types of annuity plans;
In deferred annuity plan, annuitant receives a regular income after expiration of specified term say after 10 years, 15 years, or 20 years. In terms to receive a regular income, annuitant invests money for a fixed term (opted by annuitant); and insurance company accumulates all payments of annuitant. The period of accumulation is called as accumulation period and the period of payout or liquidation (when annuitant receives periodic pensions) is called payout or liquidation period. Deferred annuity plans are suitable for those who have some time in retirement for example; let’s say John’s present age is 25 yrs and his retirement age is 45 yrs; in this scenario, John may opt deferred annuity plan; because he is working and has many years before he retires.
As name suggests that immediate annuity plan is designed to fulfill immediate needs of pension. To receive immediate annuity benefits, annuitant invests one time lump sum; and after a small interval say 6 months, 1 year, he/she starts receiving pension for rest of life. Immediate pension plan is suitable for those approaching retirement and want a regular income source to cover basic living expenses.
Life Annuity: In Life annuity plan, annuitant receives periodic payments for lifetime. Some life annuity plans give periodic payments to beneficiary upon death of annuitant; but in pure life annuity, annuity ceases upon death of annuitant.
Annuity Certain: Annuity certain plan provides periodic payments for a certain period. Annuity certain does not cease upon death of annuitant; in case annuitant dies the beneficiary receives periodic payments.
Joint Life Annuity: In joint life annuity, annuitant receives lifetime periodic payments; and upon the death of annuitant 50% (approx.) of the annuity is paid to the spouse. It is remarkable that if spouse dies before the annuitant; then upon the death of annuitant, annuity would cease.
Guaranteed Annuity: In guaranteed annuity plan, annuitant invests his money for certain period and receives fixed periodic payments regardless of performance of the accumulated amount. In guaranteed annuity, insurer bears all the risks related to the performance of accumulated amount because annuitant is reluctant to do so.
Variable Annuity: Variable annuity plan offers fluctuating periodic payments. Payments are not fixed in case of variable annuity plan; sometimes annuitant may receive higher payments and may not receive the same next time. In short, annuitant handles all the risks related to his/her accumulated amount.