Rita is a school teacher who will be retiring from her job in a few years. She had saved up a considerable amount of money over the years and was looking for ways to get a fixed monthly income after her retirement.
She had heard about annuity plans but was unsure about which type of annuity plan would suit her the best.
So, in this article, we look at the different types of annuity plans. We can segregate it into three categories:
- Starting time of the annuity payout
- Type of pension amount
- Type of annuity scheme
Annuity scheme based on the starting time of the annuity payout
Immediate annuity
An immediate annuity is a type of annuity that requires a single premium payment instead of multiple payments.
In this type of annuity plan, there isn’t a lot of gap between the accumulation and disbursal phases. The accumulation phase is when you pay premiums. The disbursal phase is when the insurance company pays the annuity income to the policyholder.
Here, the guaranteed payout will start immediately as per the plan’s terms and conditions at predetermined intervals. This type of plan is better suited for individuals on the verge of their retirement and would require a specific monthly income regularly.
READ MORE: What is an annuity plan? All you need to know
Deferred annuity
The structure of this annuity plan is opposite to that of an immediate annuity. In the case of immediate annuity plans, the annuity income starts almost immediately after the payment of the lump sum premium. But, in the case of a deferred annuity, the policyholder accumulates the amount over a period of time.
This plan is best for individuals who are still employed and have a couple of years left for retirement. The accumulated amount can then be used to buy the annuity at retirement.
Annuity plans based on the pension amount
Fixed annuity
In this plan, a fixed and constant amount is paid out throughout the annuity plan’s tenure or till the policyholder’s death. As the annuity remains constant, the amount paid out might be less. Moreover, it is important to keep in mind that inflation reduces the value of money over a period of time. And so, the real value of the guaranteed constant annuity will decrease over time. However, the constant income protects retirees from lowering interest rates.
Variable annuity
Just like in the case of mutual funds, your annuity plan can also invest in a range of assets, such as conservative investment options that will include guaranteed fixed account and government bond funds and riskier options such as large cap funds and small-cap funds. There are options with a moderate risk that will invest in a mix of conservative and high-risk investment options.
In most cases, you will receive an option to go for the minimum guaranteed annuity plan. During the course, you can switch from one asset class to other. So, as the investments are made in various investment options, the annuity income will depend on the interest or returns generated by the investments. Hence, the annuity income will vary.
READ MORE: Is an annuity a good investment option? Here are its pros and cons
Annuities based on the type of pension scheme
Life annuity: In this policy, the retiree receives a guaranteed pension for the rest of their life.
Life annuity with return of corpus or Return of Purchase Price: Here, the annuity income is paid to the annuitant, and the initial investment amount is returned to the nominee.
Guaranteed annuity for a fixed amount of time: The pension is paid to the annuitant for a specific number of years, such as five, 10, 15 or 20 years. The nominee of the person receives the remaining pension if the annuitant dies before the end of the tenure.
Annuity guaranteed for specific years and life: It is similar to the above type of annuity plan. However, if the annuitant survives the term, they will receive the same pension for the rest of their life.
Life annuity with Joint life, last survivor: In this case, the annuity income is paid to two individuals till their death.
Life annuity with a contingent survivor: Here, the annuity is paid to the principal annuitant for life. And, after the death of the principal annuitant, the surviving spouse gets the same annuity income for the rest of their life.
Life insurance companies can also introduce a combination of these types of the pension scheme.
Conclusion
Annuity plans provide a stable income stream in retirement. There are different types of annuity plans, and it caters to different needs. It is essential to understand the different types of annuity plans before investing. It is important to choose the one that suits the most.
Padmaja Choudhury is a freelance financial content writer. With around six years of total experience, mutual funds and personal finance are her focus areas.
