Pension And Annuities
What is an annuity for life insurance?
An annuity is a contract with a life insurance company under which you receive fixed payment on an investment for a lifetime or for a specified number of years. The person who buys the annuity by paying the premium is called the annuitant and the company that provides the annuity benefit is called simply the life insurance company or an annuity provider.
What are different types of annuities?
Annuities can be divided into two types —
- Deferred
- Immediate
In deferred annuity, you save in a systematic manner to build up sufficient funds for retirement. The withdrawals start after the retirement of the investor. This type of annuity represents the accumulation phase during which the annuitant pays premium to the insurer.
In the immediate annuity plan, you invest a lump sum amount as the premium and the insurance company starts paying back annuity immediately. These are suitable for investors who have retired already or are nearing retirement, and want steady income from the accumulated retirement corpus. This type of annuity represents the distribution phase or liquidation phase.
What are different annuity payment options?
There are various annuity payment options that you can opt for. You should select the options that suit your specific needs the best. Some of the popular options are:
- Life annuity: This option pays you annuity for life. The payment stops when you die. Thus, it is suitable for someone who does not have any financial dependents.
- Life annuity with return of purchase price: This option pays you an annuity for life and on death the initial purchase price (premium paid in the beginning) is returned back to the nominee.
- Joint life and last survivor annuity: This option pays annuity throughout your life and on death continues the annuity during the lifetime of the named spouse. Thus, it takes care of the expenses of both partners.
Life annuity increases at a fixed rate: In this option, the annuity amount increases every year at a simple rate. This option may work well for those who have not factored in inflation and need an increasing annuity with each passing year. This option needs a bigger corpus to sustain over the long term.
