retirement planning

How to use annuities for retirement planning

Every one dreams to become financially independent by the time they reach their retirement age. With Government jobs becoming scarce and in the absence of any kind of pension schemes offered by the employer in private jobs, the present generation particularly those between 25 and 40 of age will have to make their own arrangements for their evening of life. But with a little bit of planning and discipline of regular savings, one can lead an independent and a comfortable life, even after reaching their non-earning years.

The insurance schemes, which provide pension to the clients, are known as Annuity Policies in Insurance parlance. Most of the Life Insurance companies sell these policies and the policies are broadly classified under two categories viz., Immediate Annuities and Deferred Annuities.

Immediate Annuity:

Annuity can be purchased from any Life Insurance Company by paying a lump sum amount known as Purchase Price and the Annuity amount will be credited from the following month to the Bank Account of the client through NEFT every month if monthly mode of Annuity is opted for. The client can also opt for other modes of receiving Annuities like Quarterly, Half-yearly or Yearly.

Though the rate at which these annuities are paid are slightly lesser when compared the other Monthly Income Schemes of Post Office or any Nationalized Bank, the following are some of the major advantages of these Annuities:

  • Payment of Annuity at a uniform rate throughout the period of the policy
  • No limit on the span of payment of annuities
  • No Maximum limit either on the Annuity amount or on Purchase price (lump sum payment)
  • The annuities will continue to be paid to Spouse even after the death of the Annuitant, if opted for
  • The Purchase Price will be returned to the nominee on the death of the Annuitant, if opted for
  • No loans can be granted on the amount invested – to ensure that purpose of purchase of Annuities is served and the Client receives a fixed sum of amount every month as long as they survive, making him/her truly independent
  • The policy CANNOT be surrendered
  • No Medical Examination will be required since there will not be any insurance coverage

Deferred Annuity:

This plan is intended for younger people, who still have good number of years left for accumulating their corpus fund for retirement. Most of the Deferred Annuity plans available with various Insurance companies are Unit Linked Plans. The ULIPs typically have both the risk premium and savings premium and with the reduced loading and Fund Management charges, ULIPs are expected to generate reasonable returns over a very longer period of time. Some companies are also offering Non-linked Pension plans, wherein the amount is invested in the debt funds for stable returns.

At the time of maturity, the Client will have an option to commute 1/3rd of his accumulation and Annuity will commence on the remaining 2/3rd of Sum Assured. If the Client wishes not to opt for commutation, Annuity will be released on the full accumulated value of the Annuity Policy. In case of ULIPs, the NAV at the time of Maturity of the policy will become Purchase Price and annuity amount will be decided accordingly.

There are two payment options for Deferred Annuity – Single Premium and Regular Premium and both modes are available with Traditional and ULIP policies.

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