How Does Annuity Plan Work?

Nobody wants to keep working forever. At some point, you look forward to the day when you hang it all up and enjoy retirement. For all the great things that retirement offers, people often end up having an unrealistic idea about it. The biggest flaw is that while you are no longer working, you still have needs that are fulfilled with money. Moreover, these needs only grow at retirement age. Hence, you need a steady income to support yourself during retirement. That is where annuity plans come in.

An annuity plan is an insurance product designed to provide you with a regular income after you have stopped earnings in retirement. The investment in these plans is made in a lumpsum payment. This amount is then invested in appropriate opportunities. The money is then given to you in regular payouts. This way you have a regular income after retirement.

Types of Annuity Plans

  • Deferred annuity

Under deferred annuity, the money has to be invested for some time before the regular payouts begin. It is ideal for people that are still working and have a small amount of time before retirement. Moreover, deferred annuity also has the option of life coverage. This means that in case of the death of the policyholder, a nominee is paid a lump sum amount.

  • Immediate annuity

As the name suggests, in an immediate annuity, you start receiving payments right after you make the initial investment. If you are close to your retirement age, an immediate annuity is the perfect option for you. If you have already bought a deferred annuity plan, you can still convert it into an immediate annuity. This way, you don’t have to wait for your payouts to begin.

How Do Annuity Plans Work?

The working of an annuity plan is different across various plans. Different insurance providers offer similar types of plans. However, the specifics of each plan are different. The basic working of the policy is that you have to invest a lumpsum amount into the plan instead of regular premium payments as with other insurance products. In exchange for this investment, the plan will offer you payouts. The payout is the part of the policy, which may differ for different policyholders.

  • Life annuity

This pension plan is very simple. In this situation, you will receive regular payouts from the insurance provider throughout your life. You can decide the frequency of payouts. You can choose between monthly, quarterly, or yearly payout options.

  • Life annuity with return of purchase price

This is similar to the life annuity option in the sense that it offers payouts throughout your life. But, it offers an extra benefit. If the policyholder dies at the time the plan is active, the initial amount you invested into the plan is returned to your nominee.

  • Guaranteed annuity

Firstly, this option has a fixed time period. This means you will receive regular payouts as per the terms of the policy for a limited time. This time period can be anything that your insurance provider allows you to select. In the case of your death during this time period, your nominee continues to receive the payouts for the rest of the duration of the policy. The payouts stop once the term of the policy is up.

  • Joint life annuity

A joint life annuity option is similar to opening a joint account or taking a joint loan. You make the lumpsum investment into the plan and receive payouts. However, the duration of these payouts is connected to both your and your spouse’s lifetime. Since the policy is taken by two individuals, the payouts continue as long as either individual is living.

  • Joint life annuity with return of purchase price

This option is in every way similar to a joint life annuity. The same logic applies that until either you or your spouse is alive, the payouts will continue. However, the deal gets even sweeter buy adding a return of purchase price option. As per this option, if both you and your spouse die while the plan is active, your nominee receives the original amount you invested into the plan.

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