What are Immediate Annuity and Deferred Annuity- Facts you need to know with various examples
Before, jumping into the detail discussion first you should know what is annuity. Then I will discuss on Immediate Annuity and Deferred Annuity plans.
⇒What is Annuity?
Annuity is popularly known as a Pension plan. An Annuity can be defined as a contract between two parties such as an insurer and a policy holder, whereby the insurer agrees to pay a predetermined amount for a specific period of time to the policy holder in exchange of the money now being paid by the policy holder or the annuitant.
This means the notion is like ” You pay Us now and We will pay you later “
This payment by the policy holder can be either in a lump sum or monthly basis over a specific period of time. In return, the policy buyer would receive a specified amount over a specific period of time either annually, semi-annually, quarterly or monthly basis.
Thus, Annuity or Pension plan offers the policy buyer a guaranteed income flow after his or her retirement. This guaranteed regular income acts as the retirement income so that you don’t need to worry about your post-retirement income. There are different types of annuities available in India right now. So, today I have decided to write a blog post on What are Immediate Annuity and Deferred Annuity. In this blog post, you would learn in detail about an immediate annuity plan and a deferred annuity plan with some examples.
You may want to read about the types of life Insurance policies:
What are the features of Annuity Plans?
- Annuity plans are offered by the insurance companies;
- Annuity plans are of two types like immediate annuity and Deferred annuity;
- Individual subscribers can opt for this plan;
- It provides a guaranteed pension at the time of retirement;
- Most of the annuity plans are deferred in nature whereby the annuity payment will start at a pre-specified time in future;
- Annuity plans offer life risk cover during the accumulation phase;
- This is a defined benefit pension plan where the payment of pension id guaranteed;
- The accumulated sum along with additions and bonus help in generating fixed income for the annuitant;
- The annuitant or the policy buyer has the plethora of option to choose the best-suited option for him;
- It also offers the benefit of 1/3rd commutation at the time of retirement.
⇒Are Retirement or Pension Plans considered as Annuity plans?
Yes in general terms, the retirement/pension plans are same as annuity plans. People who are nearing retirement love retirement plans or annuity plans most. Annuity plan ensures them a certain post-retirement flow of income. Under a retirement or pension plan, contributions are to be made up to the retirement or for a certain period of time. All pension plans are defined assured benefit plans in the form of assured return on the premiums paid or guaranteed death or maturity or surrender benefit. The retirement/pension plans are offered by various Life Insurance Companies in India. However, nowadays some Mutual Funds AMCs are also offering retirement cum annuity plans. Currently, NPS is one of the most popular retirement annuity plans in India.
⇒What are the Types of Annuity plans?
Annuities are of different types like an immediate annuity and a deferred annuity plan. Depending upon the varities of annuty plans, the upfront charges are deducted from the investment or premiums of the investors. One-third of the accumulated corpus under deferred annuity plans can be withdrawn or commuted as a lump sum. Like NPS, under retirement or pension plans, the remaining (2/3rd) corpus is used to buy an annuity plan that will generate regular guaranteed pension after retirement.
There are primarily two phases of annuity one is the accumulation phase and the other one is the distribution phase.
Accumulation phase: Under this phase, the investor or annuitant deposits his money into his annuity account.
Distribution phase: In this phase, the insurance company starts making monthly regular payments until the whole life of the annuitant.
Immediate Annuity and Deferred Annuity
⇒What is an Immediate Annuity?
A pension plan is also known as an immediate annuity plan. An immediate annuity plan can be described as a contract between the insurance company and the policy buyer whereby the insurance company has agreed to pay a specified amount of annuity or pension on regular intervals over a period of time or for a lifetime.
⇒How does an Immediate Annuity work?
In an immediate annuity, only a single premium is to be paid. This means there is no accumulation phase, unlike deferred annuity plans.
The single premium paid to the life insurance company is known as the purchase price. The premium paid for an immediate annuity plan is in a lump sum instead of over a period of time. As soon as the annuitant (Policy holder) pays the single premium he starts receiving the pension immediately as retirement income after one year from the date of premium paid. Thus, you have secured a lifetime fixed income on regular intervals of your choice for a specified period of time under an immediate annuity plan. This plan is considered as a plan for lifetime income.
Let us take an example for easy understanding
Mr. X aged 55 years. He accumulated 80 Lakhs for his retirement funds and wishes to retire prematurely. For this reason, he buys an immediate annuity plan for a period of 20 years for receiving fixed monthly income for the next 10 years and a half income for the next 10 years. Now, calculate his monthly income for these two subsequent 10 years. Assume guaranteed yield 8% p.a.
⇒What is a Deferred Annuity?
Deferred Annuity can be defined as a contract between the insurance company and the policy buyer whereby the insurer agrees to pay a specified amount from a later date as decided by the annuitant. In exchange, the policy buyer has to pay a premium over a period of time which is called the accumulation phase. This premium payment can be made either through a single premium or as regular premium. Thus, it can be said that under a deferred annuity plan one has to Pay premium over a period of time(Accumulation phase) and start receiving income(Distribution phase) as per your choice. The
This means under the deferred Annuity plan the annuity/pension does not begin immediately and rather it is deferred up to a certain time as per the terms of the contract. The annuity payout typically starts after retirement.
⇒How does a Deferred Annuity work?
Under a deferred annuity plan, the annuitant receives guaranteed income for the period as specified in the policy. The annuity income is fixed but the tenure of receiving of income depends on the discretion of the annuitant at the time of taking pension policy. A deferred annuity can be bought by an annuitant under three alternatives. These periods are further categorized into 3 options. They are as follows.
Option-1. Period certain annuity:
In this option, the investor is guaranteed a specific payment for a specified period of time say 25 years or 30 years. If unfortunately, the policy buyer dies before the end of the policy period, his nominee or beneficiary will receive the balance annuity income for the balance specified period.
Option-2. Life certain annuity:
In this option, the investor is guaranteed a specific payment for the rest of his life i.e. until his death. There will be no survival benefit what so ever. In case of death, the insurance company stops the annuity payment. Interestingly if the policy holder dies before the end of the policy period, the entire balance in his account will be retained by the insurer;
The main purpose of this type of annuity is that it provides protection against outliving one’s retirement money. This annuity provides a guaranteed and regular amount of income for the whole life of the policy buyer.
Option-3. Life with period certain annuity:
This annuity is a combination of the above 2 annuities. Thus, the annuitant receives a guaranteed payout either for the rest of the life or until a specified period, whichever is early.
Let us take an example for easy understanding
Mr. X aged 55 years. He accumulated 80 Lakhs for his retirement funds in a deferred annuity plan and wishes to retire today at the age of 60 years. For this reason, he wants a fixed yearly pension for a period of 25 years. Now, calculate his monthly income from the deferred annuity plan for the next 25 years. Assume interest rate as 8%.
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Disclaimer : ArthikDisha neither directly nor indirectly is associated with any products, institution and promoting such kind of products. Always take the help of Financial Advisors for prudent financial decisions.