resr 5paisa Research Team 13th December 2022

Understanding different kinds of annuities

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People looking for consistent income often choose annuities. Annuities are classified into several categories which we will cover in this article.

Annuity plans are a type of life insurance contract that provides a set cash flow and primarily serves as an income source for retirees. Annuity plans are created by life insurance firms authorised by the Insurance Regulatory and Development Authority of India (IRDAI), which accepts and invests monies from individuals.

When a person retires, they leave a stream of cash flows in the form of a pension. The accumulation phase is the time before getting regular financial flows. When cash flows begin, this is referred to as the annuitization period or even the distribution phase. There are several types of annuity programmes, which are mentioned below:

Deferred Annuity

In deferred annuity plans, you pay premiums and accumulate a corpus until a predetermined period, then you purchase an annuity that provides fixed periodic payments after that period.

Immediate Annuity

In an immediate annuity, you must pay a lump sum to purchase the annuity, following which you will begin to receive monthly payments that begin immediately after the following period based on the payment frequency you choose. Payments can be made monthly, quarterly, semi-annually, or yearly.

Aside from the broad classifications mentioned above, there are several different types of annuity programmes, which are explained below:

Life annuity: Annuity payments are given to you for the rest of your life. However, annuity payments cease upon your death.

Life annuity with return of purchase price: Annuity payments are given to you for the rest of your life. However, upon your death, the purchase money of the annuity is refunded to your nominee.

Annuity certain: This is a guaranteed annuity, in which the annuity is paid for a set period, such as 5 years, 10 years, 15 years, 20 years, and so on. Payments are made until the end of the guaranteed period, assuming you are still alive. If you die during the guaranteed annuity period, your annuity payments will continue. They will cease once your guaranteed annuity period has expired.

Increasing annuity: Annuity payments, as the name implies, increase at a fixed rate every year or frequency. The increase may be based on a simple or compound interest rate.

Joint life annuity: Annuity payments are made until the last surviving annuitant dies. As a result, even if the primary annuitant passes away, the annuity payments will continue. For as long as the secondary annuitant lives, and vice versa, they will continue.

Joint life annuity with return of purchase price: It is comparable to a joint-life annuity. The only distinction is that the annuity payments cease and the purchase price is given back to the nominee in the event of the death of the final survivor.

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