November 2012

Understand : What are Annuities & Various Types of Annuities

Understand , What are Annuities , Various Types of Annuities, Deferred Annuity, Immediate Annuity, Pension Plans, Insurance


“Life is Uncertain. Only Death is Certain.”

The risk of death is covered using a life insurance. Whereas the risk of living longer is covered by Annuity 


In a life insurance contract the insurers pay on the death of the insured, but under an annuity contract the insurer usually stops paying upon the death of the annuitant.

Hence Annuities are often described as the `reverse’ of life insurance.

Annuities may be purchased from life insurance companies by a single lump sum payment or by a series of regular contributions spread over many years. Payment may be made by the annuitant or a pension scheme or by annuitant’s employer, or any other personal benefactor. 

An annuity is a series of regular payments from an annuity to an individual, referred to as the annuitant. 

Annuities can be either immediate or deferred annuities. 

Immediate annuities 

Annuity become payable immediately after they have been purchased on a lump sum payment. The annuity payments commence at the end of the month, quarter, half-year or year as per the features of the policy/option exercised by the policyholder. The commencement is called `vesting’. 

Deferred annuities 

Under deferred annuities purchase price may be paid as lump sum in advance or paid in installments over a series of years before vesting date.

Mr X at 40 years purchases a retirement plan by paying a lump sum amount of Rs.10 Lakhs and prefers receiving annuity payments after his 60th year (Called Vesting) 
The insurance company will invest the lump sum amount for 20 years and earn interest.

When Mr X is 60, the accumulated money will be used to pay a regular annuity to him. 
Age 60 years is the vesting date as the annuity payments will start from that date. 

At the time of vesting Mr. X can decide whether to buy the pension plan from the same insurance company or some other life insurer of his choice. This option to choose the pension provider is known as the open market option. 

At the time of vesting Mr X will have the choice of selecting the type of annuity plan that he would like from the annuity 
The annuity amount will depend on the type of annuity chosen and the rates prevailing at the time of vesting.

Life annuity Annuity payments are made during the life time of the annuitant and ceases on his death 

Guaranteed period annuity 

In this method annuity is payable for a guaranteed period of 5, 10, 15, and 20 or 25 years and thereafter until death of the annuitant. The amount during the selected period will be paid whether the annuitant is alive or not. During the selected period, if the annuitant dies, the annuity will be paid to his survivors & stops at the end of the selected period. If the annuitant is alive after the selected period, the annuity will be paid till his death. 

Joint life, last survivor annuity 

Annuity is purchased on life of two annuitants, usually husband and wife. The fixed pension would be paid to them. Either of them dying regardless of who dies first, the surviving spouse continues to receive the same amount of annuity payment throughout the survivors lifetime. 

Alternately, the annuitant gets annuity payments during their lifetime, and after the death of their spouse the surviving of spouse gets annuity payments at a reduced percentage during the lifetime of survivor, say 25%, 50% or 75% of the original amount of annuity.

Under this annuity the payments are made at the 100% level as long as the first named annuitant is still alive. If on the death of the first named annuitant, the spouse is still alive, the surviving spouse will receive the reduced percentage, throughout the life time as mentioned in the policy.

Mr & Mrs X, have taken a Joint life, last survivor deferred annuity policy. The annuity is to commence after 10 years. After 10 years, they start getting a monthly annuity of Rs. 25000/-. Three years later, Mr. X dies in an accident. Mrs. X will continue to get the annuity of Rs. 25000/- throughout her life time.

Life annuity with return of purchase price 

In this plan of annuity the annuitant receives regular annuity payments during his lifetime. On his death, the original purchase price is returned to the nominee/beneficiary. The purchase price in case of deferred annuity is the value of the amount of accumulation / investment at the time annuity has vested or in case of immediate annuity, the lump sum amount paid at the time of purchasing the annuity. 

Increasing annuity 

In this type of annuity the terms can be similar to any of the above, but the annuity increases every year by a fixed percentage or in line with an agreed inflation index. 

Understanding the various insurance options is the first step towards insuring the safety of family and self. 

Understand : What is Paid Up Value in your Insurance Policy

What is Paid Up Value , Insurance Policy, Surrender Value, Life Insurance Concepts, Policy Lapse, Assignment, Nomination, .

Awareness precedes success

Most of the Insurance Policy Holders are unaware of the concept of Surrender Value and Paid  Up Value in case of lapse of a policy for any reason. This note with an example will help understand the concept. 

Guaranteed Surrender Value 

Under Sec 113 of Insurance Act 1938 if a person discontinues a policy, the insurer will not be allowed to forfeit all premiums paid. In every premium there will be an element of savings element accruing in a reserve fund. Insurance Act 1938 stipulates that the insurer should pay a guaranteed surrender value, if the premiums are paid for a minimum period of 3 years. Some Insurers pay more than the amount stipulated by the Act and this is called Special Surrender values. 

Paid Up Value 

When policy lapses after 3 years the Insurer will reduce the sum assured to a sum in the same ratio as the number of years premiums paid, bearers to total number of years in term of the policy. 

If Mr X. had taken a policy for 32 years for 10 Lakhs and he has paid the premium for 8 years only, then he would have paid for the term only. The Insurer offers to pay the Sum Assured, due payable on the maturity date or death if earlier as Paid up value that is Rs. 2,50,000. 

Reduced Sum Assured (RSA is the Reduced Sum Assured or the Paid up value) =
(Total number of years premium paid X sum assured) / (Total term of the policy)

Policies are with Profits or Participating polices wherein the policy holder will be eligible to get share of surplus of insurer called the bonus. 

No bonuses will be added to the sum assured of policies without profits or non – participating policies. 

 In case of policies wherein bonus eligibility is available, the sum total of Reduced Sum Assured + bonus allocated, shall be the Paid up Value. 

Where there is no bonus eligibility for the policy, the Reduced Sum Assured shall be the paid up value. 

Premiums are paid in advance in Insurance transaction. So the policy will be in force for the term depending on the mode of payment. Obviously, a monthly mode will keep the policy alive for 1 month, in quarterly it will be for 3 months, Half yearly for 6 months and yearly for 1 year.

Mr. X had taken a Half yearly mode of payment for 10 Lakhs with profits for 32 years term. The policy had commenced on 28th March 2002. He paid the premiums due on 28th September 2009. Due to certain financial constraints he could not pay further. Upon lapse of his policy due to non payment of premiums, not all of the money paid is lost.

What is Paid Up Value , Insurance Policy, Surrender Value, Life Insurance Concepts, Policy Lapse, Assignment, Nomination,





Reduced Sum Assured = Rs 2,50,000
Add Bonus Accrued = say 1,60,000
Total Paid Up = Rs 4,10,000

How much Life insurance is another article which you will find useful….

The Business of Insurance and it’s Benefits to Economy…

The Business of Insurance in India,  IRDA, FDI regulations,  Benefits to Economy, General Insurance, Life Insurance,


Insurance, as a vibrant Financial Industry, has an enormous potential with abundant scope to source out premium collections as well provide multi facet security to people. India being a country with large rural population has potential untapped for want of more organized activity.

History of Insurance :

Existence of the concept of Insurance can be traced back to the phrase “Yogakshemem Vahamyaham” from the Bhagavad Gita and thereafter in the joint family systems.

Further, Insurance in its present profiles takes us back to the Great fire of London in 1966, trade agreements in Lloyd’s coffee house in London etc. In India, the English Company started operating in 1818. 

How has the Insurance sector Grown in India ~ 

  • 1818 First insurance company to start life insurance business in India in 1818 was the Oriental Life Insurance Company in Kolkata. The company failed in 1834.
  • 1829 The Madras Equitable started transacting life insurance business in the Madras Presidency.
  • 1870 British Insurance Act 1870 was enacted and Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) in the Bombay Residency started its activities.
  • 1912 It was breakthrough in Indian Insurance history as a first Statutory measure “Indian Life Assurance Companies Act 1912” was passed to regulate Life Insurance Business.
  • 1928 The Indian Insurance Companies Act 1928 was enacted to enable the Government to collect statistical information about both life and non-life business transacted in India by Indian and foreign insurers, including provident insurance societies.
  • 1938 To provide the Government effective control over the activities of insurers, the earlier legislation was consolidated and amended with a view to protect the interest of the insuring public
  • 1950s Move by the Government of India to nationalize insurance business as the level of competition in the insurance business was very high and there were allegations of unfair trade practices.
  • 1956 Formation of LIC: on 19 January 1956 an Ordinance was issued nationalising the life insurance sector and the Life Insurance Corporation (LIC) of India came into existence.
  • 1999 Formation of IRDA
    Insurance Regulatory and Development Authority (IRDA). The IRDA was incorporated as a statutory body in April 2000 to regulate and develop the insurance industry The key objectives of the IRDA include the promotion of competition with a view to increase customer satisfaction through more consumer choice and lower premiums, while ensuring the financial security of the insurance market. 
  • Under current regulations the foreign partner can hold 26% stake of Foreign Direct Investment (FDI) in the joint venture. Now there is a proposal to increase the FDI from 26% to 49%, which is awaiting approval in Parliament. At present there are 23 Life Insurance companies conducting Life Insurance business in India.
India emerged as the fifth largest insurance market in the world and is still growing rapidly.

The Insurance sector is poised for significant growth in the coming decade and is widely considered a sunrise sector. The contributions can help our country in various developmental activities. 

Channeling premiums into Investment projects: 
The premiums collected can be used for funding infrastructure projects and progressive activities will blossom 

These activities in turn will open new vistas of Employment opportunities and thus helps to improve living standards of people. 

The funds so channeled will ensure optimum safety and bring orderly growth of returns. Then people will have better faith in Insurance and accept insurance as a sound saving system. 

Increases the Risk taking abilities of business:
When people are assured of safety against personal risks, they tend to concentrate more on their business which in turn brings growth in business and increase in income. 

Increases Tax Revenue for the Government:
Growth in Insurance Industry indirectly promote better education to children, lucrative job opportunities, larger collections of service tax, education cess, Income Tax etc. 

Improves overall Growth of Economy:
When an individual grows, business flourishes, higher investment potential happens, brings more revenue to Government, and tension free life to business man and all industries flourish.

The Business of Insurance is a long term investment for companies. The insurance companies in India have begun to break even after almost a decade of gestation and some companies have reported profits as well. The Insurance sector is poised for significant growth in the coming decade and is widely considered a sunrise sector in India, for now.