Annuity Plan: Coverage, Types & Claim

Updated: 02-12-2022 10:25:59 AM

Planning for retirement should be an important aspect of the financial planning to avoid any financial setbacks during the golden years. This is when an annuity plan comes into play. An annuity is a type of life insurance that provides a regular source of payment during retirement phase.

What is Annuity Plan?

An annuity plan helps the policyholder to get long-term regular income during retirement. It helps in saving money which can be used during the retirement phase when the source of earning might become negligible or when he/she might not be physically fit to earn. The annuity amount can also help beneficiaries. In times of crisis like illness, injury, etc., one can sell the annuity product and use the money for any exigency.

Types of Annuity Plans

Annuity plans are of 4 types. On the basis of the payout timing, it is classified as deferred or immediate. On the basis of the type of investment, it can be classified as fixed or variable.

1. Deferred Annuity: Here, the payout starts after a certain period of time though premium payment starts from the commencement of the plan. This is known as deferment period or accumulation stage where the applicant can create a pool of money to be received later. This is a good option for people who have certain working years left with them before retirement. One can take annuity payment either as lump sum or in instalments. The plan also has the option of providing a life cover so that the nominee gets a lump sum amount on the sudden death of the policyholder.
   
2. Immediate Annuity: In this plan, the payout starts as soon as the policy is purchased and the premium is paid. It is suitable for people who are about to retire or have retired. Thus, you get regular income during your retirement.
3. Variable Annuity: Here, the payouts are not fixed and keep varying. This is so because they depend on the performance of the investments made by the insurance company in the market. Thus, the plan comes with higher risks, as it is market-linked. The payout will be higher if the returns are good and vice versa.
4. Fixed Annuity: Here, the payout amount remains fixed during the entire term of the annuity plan. Even the duration of the plan is fixed. So even after the death of the policyholder, the nominee will continue to get the fixed payout.

Eligibility Criteria

One has to fall under a certain age group (between 35-75 years) to be eligible for a pension plan. The age bracket here may vary from company to company.

Documents Required for Purchasing Plan

Following documents are required to purchase an annuity plan:

Proposal Form

Medical Reports (This is not a pre-requisite, but some insurance providers might ask for them.)

Factors to Consider Before Applying for Annuity 

There are various ways to make arrangements for income during retirement. One of them is annuity. Let us look at some points to keep in mind while deciding the type of plan to opt for.

• Time left for retirement: If you are young and still have good number of years left for your retirement, deferred annuity is the best bet. Whereas if you are about to start your second innings (post-retirement stage), immediate annuity shall yield best results
• Income source post-retirement: For those who have some alternative income source after retirement, the annuity amount can be lowered, as this will also lower the premium amount. Otherwise, a bigger amount should be invested in annuity so as to replace the main income source
• Solvency of insurance company: Since annuity is a comparatively long-term product, say 30-40 years, it is imperative to make sure that the insurance company carries good credibility. To determine this, one can look at the company’s financial standing; the higher, the better

Claims Process

The amount one has invested in an annuity keeps on earning interest till the policyholder/owner withdraws it or is used to give payouts. Since this is not an insurance plan, the claim process is also not the same.

• On the event of death of the owner of the annuity, the nominee is required to inform the insurance company about the same as soon as possible
• Fill out the forms that the insurance company will send you as it may differ from provider to provider
• Submit the documents asked by the company in order to process the claim
• Select the payment option, lump-sum or instalments

Documents Required for Claims Process

Here are the common documents required for hassle-free and timely claim process:

• Claim form
• Death certificate
• ID proof of the owner and nominee(s)
• Any other document asked by the insurance company

Important Aspects 

Always keep these aspects in mind so that you reap the benefits and do not end up wasting your money:

• An annuity plan is a plain savings instrument where you are not insured against any unforeseen events
• Before buying an annuity, it is suggested to take into account the commission fee charged by your insurance company, since it is usually high and can affect your budget otherwise
• If you want to withdraw the money during the accumulation stage, you may have to pay surrender charges
• If you exit your annuity before retirement, you may have to pay the taxes for the premium that are otherwise tax exempted
• Capital gains from the annuities is taxed by the government under the Income Tax Act, 1961

Advantages of Annuity Plan

Let us look at the benefits of getting an annuity, apart from providing peace during retirement.

• Guaranteed income/pension: Unlike an insurance plan, annuity is a sure-shot return. Whatever the money you invest in an annuity is bound to come back. Annuity acts as a reliable source of income post retirement. Using this instrument, you can plan in advance and live a financially independent life after retirement
• Tax friendly: The money invested in an annuity product grows tax free. This means that the principal amount invested in the market is exempted from tax and is invested grows in the market. The income from this growth is taxed. The premium paid is also tax exempt under Sec 80C of the Income Tax Act, 1961
• Death benefit: In case of an untimely demise of the policyholder, the nominee gets a guaranteed death benefit. This amount is usually 105% of all the premiums paid till date. Along with this, if the owner had opted for any top-up, proceeds of the same shall be included in death benefit

FAQs

Q1. What is ‘Vesting Age’?

Vesting age is the age at which the annuity owner starts receiving the annuity.

Q2. Can I withdraw from my annuity during accumulation period?

Yes. Certain rules & regulations are to be followed along with some charges to be paid to the insurance company for withdrawal. 

Q3. What are the various options for receiving annuity payouts?

The payout amount can be received through bank cheque or online transfer in the account.