What is an Annuity, and How Does it Work?

Adulthood is that time of every one’s life when constantly working on your sources of income is the ultimate goal. One works to generate enough income to live a comfortable life, a cycle that continues well into middle age to old age. However, there is surely going to be a time when there will be no more income, and you will run the risk of outliving your accumulated savings. The post-retirement period of one’s life can be a sketchy one if the necessary measures are not taken to ensure a steady income enough to live a comfortable life. This can be done by learning what is an annuity and investing in one.

 

  • What is an annuity?

 

An annuity is a type of investment plan that is used to create a steady stream of income post-retirement. This is done by initially paying a premium amount to your insurance company, which is invested and paid back through the generated returns. This can be divided into two phases:

 

  1. Accumulation Phase: This refers to the phase when you accumulate your funds to get ready to pay premiums. This phase starts from the day you first start paying premiums.

 

  1. Vesting Phase: This phase begins from the day you start receiving the policy benefits.

 

Here are the different types of annuities and how they work:

 

  • Immediate Annuity Plans: These are the plans that do not have an accumulation and vesting phase. They require you to make a lump-sum payment to your insurance company, and you start receiving its benefits immediately for a lifetime or a limited tenure.

 

  • Deferred Annuity Plans: These types of annuity plans go through both the Accumulation Phase and the Vesting Phase. 

 

These types of annuities are further divided into multiple other types that you can choose from, as per your needs. Here are the main types and how they work:

 

  • Life Annuity: This type of annuity provides regular payouts to you from your purchased scheme, and the same stops after you pass away.

 

  • Life Annuity with Return of Purchase Price: This is a plan that provides you with regular payments until you die. After that, the initial amount which was paid by you to purchase the annuity is paid out to your nominee.

 

  • Join Life Survivor Annuity: This annuity plan provides regular payments as long as either you or your spouse live.

 

  • Joint Life Annuity with the return of Purchase Price: This plan keeps providing payments till you or your partner are alive. After the death of both, the initial amount that was paid to buy the annuity is paid out to your beneficiary.
  • Inflation-indexed Annuity: This is designed to cover the increase in expenses as prices increase with inflation. There is a rise in the amount payable, for, eg. 2% or 5%.

 

Along with these types, there are many others that you can take a look at to find one that suits you best. Learn more about what is an annuity from ICICI, one of the top insurance companies in India. You can also check out the plans offered by them while you’re at it!