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. 

June 2012

Pension Policies and Differences between conventional life insurance plans and pension plans

 
retirement planning,life  insurance, pension policies, bonus,  life, maturity, tax benefits, nominee, beneficiary, business, What are pension schemes?
—Policies that offer money to the insured at the retirement age.
—If death occurs during the policy term, his nominee gets the amount – lump sum or as annuity.
—Pension plans (also referred to as retirement plans) are offered by insurance companies to help individuals build a retirement corpus. On maturity this corpus is invested for generating a regular income stream, which is referred to as pension or annuity.
—Pension plans are distinct from life insurance plans, which are taken to cover risk in case of an unfortunate event.
Classified as immediate or deferred pension plans.
 
Here are some of the differences between a traditional insurance policy and pension plans.
 Parameter Conventional insurance plans Pension Plans
Maturity payouts Full maturity amount received by the individual Only up to one-third of the maturity amt can be withdrawn. Remaining 2/3rd amt has to be compulsorily invested in an annuity
Death benefits Full maturity amount received by the nominees/ beneficiaries Nominees/ beneficiaries have the option of receiving either the entire maturity amt or investing up to 2/3rd of the amt in an annuity
Tax benefits Deduction up to Rs 100,000 available under Section 80C Deduction up to Rs 10,000 available under Section 80CCC
Taxation of maturity payouts Entire maturity amt treated as tax free in the hands of the receiver Up to 1/3rd of the maturity amt, if withdrawn, is treated as tax-free. Pension received on the remaining 2/3rd amt is taxed as per the individual’s tax slab
Stream of income Entire maturity amt/ death benefit received in one go. No provision for a stream of income by way of pension On maturity, provides for a regular stream of income. In case of an eventuality, option of pension benefits available