An annuity plan is an insurance product which provides pay outs of fixed and regular dividends. While being quite popular amongst retirees, an annuity is essentially a contract between the insurance company (insurer) and the investor. It mandates the insurance company to pay out a certain sum—either immediately or in the future—to the investor for a specific period. In fact, there are a few annuity plans that offer regular pay outs throughout the remaining life-span of an investor.
Primarily, annuity plan schemes are of two types: immediate and deferred.
In the case of immediate annuity plans an investor is required to pay a lump sum amount to the insurer and the payouts start immediately. Such plans are ideal for individuals who have already retired and look forward to a stable passive income. As per the chosen plan, the payouts can be either for a certain period or for the remaining life of the investor.
On the other hand, deferred annuity plans are retirement schemes for people who are yet to retire but want to start investing to ensure a stable inflow of cash after retirement.
In line with a systematic investment plan (SIP), such plans have a certain accumulation period during which the investor invests a specific amount on a regular basis. After this accumulation period, the annuity scheme starts to pay at regular intervals, which could also be a lump sum payment in some cases.
While being quite different from stocks, bonds, and mutual funds, annuities are an insurance product, which tend to offer additional benefits, including tax exemption and premium protection.
Most annuity plan schemes are designed taking into account factors such as rise in inflation as well as medical expenses. Annuity plans remain an ideal source of investing to generate monthly income, particularly in the case of retirees.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
