Retirement is that period of your life when your regular income stops. However, your lifestyle and medical expenses continue irrespective of your income. In this situation you need to arrange for a source of income to fund your lifestyle expenses. This is where retirement oriented life insurance plans come into the picture.
These plans are called pension or annuity plans and an immediate annuity plan helps you substitute your income even in your retired years.
Do you know how? Let’s explore –
Table of Content
- What is an immediate annuity policy?
- Annuity payment options
- How does immediate annuity plan work?
- Tax implication of immediate annuity plans
- Companies offering immediate annuity plans
- Buying immediate annuity
What is an immediate annuity policy?
Immediate annuity is a type of life insurance pension plan. Under this plan, you are promised a series of annuity payments for as long as you live. Moreover, there are joint life immediate annuity plans as well which promise annuity payments for the lifetime of your spouse as well.
Features of immediate annuity plans in India
Immediate annuity plans have the following salient features –
- Single premium is payable under the policy which is called the purchase price
- You can choose the annuity payment frequency which can be monthly, half-yearly, quarterly or annually.
- The person on whose life the annuity is paid is called the annuitant.
- There are different annuity payment options and you can choose any option.
- Annuity can be chosen to be received on a single life or joint life. In case of joint life annuities, the spouse can be covered. The policyholder would be called the primary annuitant and the spouse would be the secondary annuitant.
- The annuity stops on death of the annuitant.
Annuity payment options
As stated earlier, there are a lot of annuity payment options under an immediate annuity plan. These options include the following –
| Annuity option | Meaning |
| Annuity for life | Annuity is paid till the lifetime of the annuitant. |
| Annuity certain | Annuity is paid for a certain guaranteed period which can be 5, 10, 15 or 20 years whether the annuitant survives this period or not. If, however, the annuitant survives the guaranteed period, annuity is then paid for his/her lifetime. |
| Annuity for life and return of purchase price | Annuity is paid till the lifetime of the annuitant. When the annuitant dies, the purchase price is refunded back to the nominee. |
| Joint life annuity | Annuity is paid till the lifetime of the primary annuitant. On death of the primary annuitant, if the secondary annuitant is alive, the annuity is paid till the lifetime of the secondary annuitant. The rate of annuity payable to the secondary annuitant can be 50% or 100% of the annuity paid to the primary annuitant. |
| Joint life annuity with return of purchase price | Annuity is paid till the lifetime of the primary annuitant. On death of the primary annuitant, if the secondary annuitant is alive, the annuity is paid till the lifetime of the secondary annuitant. The rate of annuity payable to the secondary annuitant can be 50% or 100% of the annuity paid to the primary annuitant. When the secondary annuitant also dies, the purchase price is refunded back to the nominee. |
| Increasing annuity | Annuity is paid till the lifetime of the annuitant. This annuity increases every year at simple or compound rate of interest. The rate of interest depends on the plan and ranges between 3% to 10%. |
How does immediate annuity plan work?
When you buy an immediate annuity policy, here’s how the plan would work –
- You buy the policy by paying a lump sum amount premium at once.
- You have to choose the annuity payment option that you like. There are different annuity payment options and you can choose any one as per your requirement.
- You also have to choose the annuity payment frequency.
- Once you have bought the policy and chosen the annuity payment option and frequency, you would start receiving annuity pay-outs immediately from the next frequency. For instance, if you buy the policy on 1st January and choose monthly payment frequency, annuity payments would commence from 1st February.
- The amount of the annuity is fixed and is specified beforehand.
- The annuity payment would continue for as long as you are alive. In case of joint life annuities, annuity payments continue till the lifetime of the last survivor.
- On death, the payments would stop and the policy would be terminated. The availability of death benefit would depend on the annuity payment option that you have selected.
Benefits of immediate annuity policies
By buying immediate annuity plans, you get the following benefits –
1. Guaranteed Income for Life: Immediate annuities provide a guaranteed income stream that can last for the rest of your life, regardless of market fluctuations or economic conditions. This can provide peace of mind and financial security, especially for retirees concerned about outliving their savings.
2. Stable and Predictable Payments: With an immediate annuity, you receive regular payments on a predetermined schedule, typically monthly, quarterly, or annually. These payments remain stable and predictable, making it easier to budget and plan for expenses in retirement.
3. Protection Against Market Volatility: Immediate annuities shield you from market volatility and investment risks. Unlike stocks, bonds, or mutual funds, your income from an immediate annuity is not affected by fluctuations in the stock market or changes in interest rates.
4. Simplicity and Ease of Management: Immediate annuities are straightforward financial products that require minimal ongoing management. Once you purchase an annuity, you don’t need to make investment decisions or monitor market performance. This simplicity can be appealing, especially for individuals who prefer a hands-off approach to managing their finances.
5. Longevity Protection: Immediate annuities provide protection against the risk of outliving your savings, also known as longevity risk. Since the income payments are guaranteed for life, you can ensure that you’ll have a steady source of income no matter how long you live.
6. Tax Advantages: Depending on the type of annuity and your jurisdiction, some immediate annuities offer tax advantages. For example, if you purchase an immediate annuity with funds from a qualified retirement account like an IRA or 401(k), you may be able to defer taxes on the annuity payments until they are received.
7. Customizable Options: Immediate annuities often come with customizable options that allow you to tailor the annuity to your specific needs and preferences. For example, you can choose between single life, joint life, or period certain payout options, as well as add features like inflation protection or death benefits.
8. Protection Against Inflation: Some immediate annuities offer inflation-adjusted or cost-of-living-adjusted payment options, which help protect your purchasing power against the effects of inflation over time. This can be particularly important for retirees who anticipate living many years into retirement.
9. Creditor Protection: In some jurisdictions, annuities may offer protection from creditors, providing an additional layer of financial security in certain circumstances.
10. Legacy Planning: Immediate annuities can be structured to include death benefits or remaining payment guarantees, allowing you to leave a legacy for your beneficiaries. This can be an attractive feature for individuals who want to ensure their loved ones are provided for after they pass away.
Drawbacks of immediate annuity policies
Though immediate annuity insurance promises the above-mentioned benefits, there are one or two drawbacks which you cannot overlook. These include the following –
1. Loss of Control over Principal: When you purchase an immediate annuity, you typically give up control of the lump sum you invest. This means you won’t have access to that money for other purposes or emergencies.
2. No Liquidity: Immediate annuities are not liquid assets. Once you purchase one, it’s difficult to access the principal amount if you need it for unexpected expenses.
3. No Potential for Growth: Unlike other investment options like stocks or mutual funds, immediate annuities typically do not offer the potential for capital appreciation. Your payments are fixed and may not keep pace with inflation, leading to a decrease in purchasing power over time.
4. Inflexible Payment Options: While immediate annuities provide a guaranteed income stream, the payment options you choose at the outset are usually fixed and cannot be changed later. This lack of flexibility can be a drawback if your financial needs or circumstances change.
5. Impact of Inflation: Unless you purchase an inflation-adjusted annuity, the purchasing power of your annuity payments may decrease over time due to inflation. This could result in a reduced standard of living in the future.
6. High Fees and Commissions: Some immediate annuities come with high fees and commissions, which can eat into your returns over time. It’s essential to carefully review the fee structure before purchasing an annuity.
7. Tax Considerations: Annuity payments are taxed as ordinary income, which could result in a higher tax liability depending on your tax bracket. Additionally, if you withdraw funds from a tax-deferred annuity before age 59 ½, you may be subject to an additional 10% early withdrawal penalty.
8. Credit Risk: If the insurance company issuing the annuity becomes insolvent, there’s a risk that you may not receive the full amount of your annuity payments. While annuities are typically backed by state guaranty associations, there are limits to the coverage provided.
9. Complexity: Annuities can be complex financial products with various features and options. Understanding all the terms, conditions, and potential risks associated with an immediate annuity requires careful consideration and, in some cases, professional advice.
10. Potential for Over-Commitment: Once you purchase an immediate annuity, you’re locked into the terms of the contract. This lack of flexibility can be a drawback if you later regret the decision or if your financial needs change in unexpected ways.
Barring these drawbacks, immediate annuity plans provide a lot of benefits and should be chosen if you need regular income after you retire.
Tax implication of immediate annuity plans in India
Annuity plans have different tax implications compared to other life insurance plans. These implications are as follows –
Tax implication of the premium paid
The premium paid for the plan is allowed as a deduction under Section 80CCC. The maximum limit of deduction is INR 1.5 lakhs which also includes deductions under Section 80C.
Tax implication on annuity received
Annuity payments qualify as income in your hands. They are added to your total income and are taxed at your relevant tax slab rates.
Companies offering immediate annuity plans in India
Though immediate annuity policies are offered by almost all life insurance companies, here are the best plans for you to buy –
LIC’s Jeevan Shanti Plan
This plan combines immediate and deferred annuity benefits and has the following features:
- You can choose to receive annuities immediately or after a specified period
- There are nine annuity options offered by the plan
- If you choose the deferred annuity option, you get guaranteed additions added to your corpus during the deferment period
- You can take a joint life annuity with spouse, siblings, grandparents, grandchildren, parents or children
Plan parameters
| Entry age | 30-85 years |
| Purchase price | Minimum – INR 1.5 lakhs Maximum – No limit |
| Annual annuity rate | Minimum – INR 12,000 Maximum – no limit. Depends on the purchase price paid |
ICICI Pru Immediate Annuity Plan
This plan is also quite popular which has the following salient features:
- There are 12 annuity options offered by the plan
- You can choose to get a refund of the purchase price on death, critical illness or accidental permanent disability
- You can choose deferred annuity payments and receive annuities from a later date
- National Pension Scheme subscribers can claim a discount of 0.5% on the purchase price
- You are promised higher annuity rates if you choose to defer your annuity incomes or if you pay higher levels of purchase price
- You can top-up your annuity amount by paying an additional purchase price
Plan parameters
| Entry age | 30 years onwards |
| Purchase price | Depends on the annuity income that you want to receive and the entry age |
| Annual annuity rate | Minimum – INR 12,000 Maximum – no limit. Depends on the purchase price paid |
HDFC Life New Immediate Annuity Plan
HDFC is a leading name in the life insurance industry and its immediate annuity plan also comes with all the benefits. The features of the plan are as follows:
- 11 annuity pay-out options are available under the plan
- The annuity rates are higher if you pay a higher purchase price
Plan parameters
| Entry age | 20-80 years |
| Purchase price | Depends on the annuity income that you want to receive and the entry age |
| Annual annuity rate | Minimum – INR 10,000 Maximum – no limit. Depends on the purchase price paid |
Buying immediate annuity policies
You can buy immediate annuity plans in India online through Turtlemint. Turtlemint gives you the following advantages of buying an immediate annuity plan from its platform –
- A choice of the best immediate annuity plans in India available in the market
- The facility to compare and buy the best plan which offers the highest rate of annuity
- Complete guidance in buying the policy by solving all your product related queries
- Dedicated claim assistance department which helps you in getting your claims settled easily and conveniently
To enjoy these benefits and to buy immediate annuity coverage from Turtlemint, here are the steps which you should take –
- Visit Turtlemint’s life insurance page at https://www.turtlemint.com/life-insurance
- Choose the coverage need ‘Pension/Retirement’
- Fill in your personal profile wherein the following details would be required –
- Your gender
- Date of birth
- Annual income level
- Smoking preference
- Retirement age
- Preferred investment tenure
- Mode of investment and amount of investment
- Your name, phone number and email ID
- In the next page you would be able to see handpicked plans as per your coverage requirements
- You can select the most suitable policy and buy it by paying the premiums online
When you buy an immediate annuity plan, you would have to submit the following documents –
- Your photographs
- Age proof
- Identity proof
- Address proof
- Any other documents as required by the insurance company
Once the required documents are submitted, the insurance company verifies your proposal and issues you the policy.
Immediate annuity plans are the best way to substitute your income after you retire. These incomes would continue till you live. You can also ensure annuity incomes for your spouse in your absence creating financial security for your family. So, if you are nearing retirement and you have a retirement corpus in your hands, invest in an immediate annuity plan and get assured income even without having to work.
Frequently Asked Questions
1. What is the meaning of vesting age?
Vesting age is the age from which you start receiving annuity payments.
2. Do immediate annuity plans offer any discounts?
No, there are no discounts under immediate annuity plans. However, many immediate annuity plans offer higher annuity rates if the purchase price is high.
3. What would happen if the secondary annuitant dies before the primary annuitant?
If the secondary annuitant dies before the primary annuitant, the annuity payments would stop after the death of the primary annuitant.
4. On what factors do annuity rates depend?
Annuity rates depend on the following factors –
- Vesting age of the annuitant – annuity rates are higher at higher ages
- Type of annuity payment option selected – rates are lower under joint life annuities than under single life annuities
- Amount of purchase price – higher the purchase price higher would be the annuity rate
- Annuity payment frequency – the lower the payment frequency the higher would be the annuity rate
Can I change the annuity payment frequency after buying the immediate annuity policy?
No, once the policy is bought, the annuity payment frequency cannot be changed.
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