Have you heard of an annuity plan? These plans are widely preferred by investors who want a predictable income stream after retirement, along with enough financial support to manage future expenses comfortably. There are several types of annuities worth understanding, such as immediate, fixed, deferred, indexed, and variable plans. This guide explains how each option works, how they can help you build a steady retirement income without complications, and how to choose the right one based on your long-term goals and financial planning needs, including life insurance.
Decoding Multiple Annuity Plan Types- A Basic Guide
Here are the various kinds of annuity plans that you should know more about.
Fixed Annuity- This plan offers a fixed payment in the future. You will have to invest a lump sum or make periodic payments and in return, get this fixed payout for a certain period or your entire lifetime. These are ideal if you are averse to risk and want guaranteed income. Insurers usually invest the premiums in low-risk instruments. Some plans may offer riders for inflation-adjusted payouts, but standard fixed annuities do not automatically include this feature. There is a guaranteed minimum rate of return during the accumulation phase, but once annuitised, payouts remain fixed.
Immediate Annuity- This annuity plan offers a guaranteed income stream shortly after the lump sum payment is made to the insurance company. These are single-premium policies, and you will typically get payouts within a month or up to a year of the investment, depending on the frequency chosen. They are suitable if you are just nearing retirement and want a reliable income stream to meet your post-retirement needs. You can also flexibly choose to receive the money every month, quarterly, or year, based on your needs. Some plans also come with features like adding the spouse to the policy or money-back provisions. Immediate annuities provide fixed payouts, while some offer optional inflation adjustments through riders. However, they do not have variable returns linked to market performance.
Deferred Annuity- In this annuity plan, you will invest an amount over a specific duration and get regular payments at a predetermined future date. These have an accumulation period where your investments grow in value, and they are ideal options if you do not require any supplementary income right away. Fixed deferred annuities offer guaranteed returns, while indexed or variable deferred annuities provide returns that fluctuate based on market-linked instruments. You may choose a plan based on your risk tolerance, with some offering predictable returns and others allowing potential gains with market exposure.
Indexed Annuity- These plans offer returns linked to a market index, such as the Nifty 50, while providing a level of downside protection. The returns are usually subject to caps or participation rates, ensuring that you benefit from market growth but with some limits. Indexed annuities strike a balance between fixed and variable annuities, making them suitable for those seeking moderate growth with reduced risk.
Variable Annuity- These plans have your instalments or lump sum amount going into market-linked instruments like mutual funds or stocks. Hence, the returns may witness a rise/dip in value depending on market performance and movements. While the risks are higher and the returns unpredictable, these plans may offer higher potential gains over a longer duration. This is ideal for those with higher risk tolerance and knowledge of multiple asset classes and market trends. If you are looking to take on more risks to gain more profits in the long haul and can weather temporary volatility, then the plan may be a good fit for your portfolio. However, variable annuities require annuitisation under specific contract terms, and their payout flexibility depends on the insurer’s options.
The above-listed guide will give you an idea of how to choose the best annuity plan that is tailored to your specific needs. Do your research on all these types and then finalise your decision based on your unique requirements and future goals.
