Annuity Meaning Explained: What You Need to Know About Retirement Income

A recent survey showed over 80% of individuals fear running out of savings in their golden age. Are you also worried about outliving your savings in retirement? If so, annuities might be a solution. In annuities, you pay a lump sum or regular payments. In return, you get a steady income during retirement. This is important for retirees in India. With an ageing population, annuities are gaining popularity. Term life insurance protects your family. Annuities, however, offer guaranteed income in retirement. Both tools are crucial for a balanced retirement strategy. They ensure financial stability as you age. This article will explore how annuities can support your financial goals.

What is an Annuity

An annuity is a financial product offered by life insurance companies. It provides regular income, usually after retirement. Some offerings provide income after a certain age too. Think of annuity as a contract with an insurance company. You pay a lump sum or regular premiums. In return, you get a steady income later. In India, many rely on bank FDs or bonds for income. However, annuities offer unique benefits. They provide guaranteed income, regardless of market conditions or interest rates. This makes them a safe option for retirees.

While term life insurance provides death benefits after your demise, annuities ensure you i.e. the policyholder don’t outlive your savings. Bank FDs and bonds can be affected by interest rate changes. Annuities offer stability. They protect you against financial uncertainty in old age.

Key annuity features you should understand are explained below.

Premium: This is the amount you pay to the insurance company. You can pay it as a lump sum or over time. It is like a deposit that secures your future income.

Annuity Period: This is the time when you receive payments. It can be for a set number of years or for life. The period depends on the type of annuity you choose.

Annuitant: The person receiving the annuity income. This is usually you, the policyholder. An annuity ensures that you have a regular income stream during retirement.

Types of Annuities in India

Annuities in India cater to various needs and risk profiles. Here's a breakdown of the types of annuities.

1. Immediate Annuity: In this product, you make a lump-sum payment, and the annuity starts paying out a regular income almost immediately. Immediate annuities are suitable for those who want to convert their savings into a guaranteed income stream right away.

2. Deferred Annuity: Here you pay premiums over time. The annuity starts paying out income at a future date chosen by you. Deferred annuity is suitable for individuals who are still working and saving, but they also want to lock in future income.

3. Fixed Annuity: This scheme provides a guaranteed, fixed rate of return on your investment. They can either be immediate or deferred. Fixed annuity is suitable for risk-averse individuals who prioritise stability and predictable income.

4. Variable Annuity: This offering gives you the potential for higher returns by investing in market-linked funds. So, the income payout can fluctuate. Variable annuities are suitable for those who are comfortable with some risk and seeking potentially higher returns.

5. Life Annuity: Similar to fixed annuity, life annuity pays out a regular income but the main difference here is the income is for the rest of your life. Fixed annuities usually pay for a specific period. As such, life annuities are suitable for individuals who want to ensure a lifetime income and protect against the risk of outliving their savings.

6. Joint Life Annuity: A version of life annuity, this plan pays out a regular income for as long as either you or your spouse is alive. So, couples who want to secure a joint income and ensure the surviving spouse continues to receive income can go for joint life annuity.

7. Annuity with Return of Purchase Price (ROP): This product guarantees that the total amount you paid in premiums will be returned to you or your beneficiaries. It's that simple. The payout will either be as a lump sum or in installments, even if you pass away before receiving the full payout. Annuity with ROP is good for those who want to protect their investment and ensure their beneficiaries receive something back.

8. Inflation-Indexed Annuity: In this unique annuity, the income is adjusted for inflation. So, the payouts ensure your income maintains its purchasing power over time. So, if you are worried about the rising cost of living, you can consider this annuity. In increasing annuity product, you are always provided increasing payouts over time. In case of inflation-indexed annuity, the payout can dip if inflation moderates.

How Annuities Work

Annuities have two main phases. The 'accumulation phase' is when your premiums are invested. This helps your money grow over time. The 'annuitisation phase' converts these investments into regular payments. This phase provides steady income during retirement. Immediate annuities skip the accumulation phase. They start payments right after your initial premium.

Imagine Ravi, a retired teacher. He invested in an annuity with his savings. Now, he receives a regular income each month. This helps him cover his living expenses without worry. On the other hand, 51-year old Meena, a businesswoman wants a steady income after retirement. So, she chooses a deferred annuity. She pays premiums while she works. Later, she will receive a reliable income stream. In case of 58-year old Suresh and his 52-year old wife Priya opted for a joint life annuity. This ensures both receive income even if one passes away.

Who Should Consider Annuities

Annuities are ideal for those nearing retirement age. They suit individuals seeking guaranteed income. Risk-averse investors benefit from their stability. Annuities also help supplement pensions or savings. They are a great addition to a term insurance plan. While term life insurance protects your family, annuities provide steady income. Consider how annuities can fit into your retirement strategy. They ensure financial security in your golden years.

Disclaimer: This article is published in association with ICICI Prudential Life Insurance and not created by TNM Editorial.