Annuity - Meaning and Importance - HRMantra HR Software

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Annuity Definition

An annuity, in simplistic words, is a contractual agreement between an individual and an insurance company under which they promise to pay a certain amount to the person, usually during their post-retirement period.

The purchase of annuities is pretty common among Indians, especially for those people who are making various plans for the money they will get at retirement. So without any further ado, let''s get deep into it.

What does Annuity Mean?

Annuities are contracts between you and the financial institution stating that the insurance will pay you money at certain times in the future or within a certain amount of time.

The amount you will receive every month for the remainder of your life, which was paid by you in one go or in installments.

What are the Different Types of Annuities?

The following are the common annuities that are sold:

Instant Annuity

There is no vesting period for this pension program. It starts paying benefits from the plan vesting age right away. In an immediate annuity, the client pays a lump sum amount to the insurance company and the payment starts right away for a stipulated amount of time or for life.

Annuity

These retirement plans are similar to pension plans but they provide an annuity once the accumulation period gets over. Deferred annuity plans are categorized into two parts i.e.

• Accumulation Phase- The accumulation phase is when the policyholder gets to invest in the plan by paying premiums from the start of the policy to build up a retirement fund for the future.
• Vesting Period- This is the time when the insurance policyholder starts getting regular annuities or pensions from the policy benefits.

Periodic Annuity

This type of annuity essentially gives money at periodic intervals to the holder. This is more like the way a pension plan works where the payments could be made on a monthly basis. In addition, the payouts could be made in installments at the end of the 5th, 10th, and 15th years, whether the premiums have been paid in full or not.

How Does Annuity Work?

Now that we know what annuities are, let''s look at how they really work.

• For one to earn an annuity, he has to pay for the annuity plan all at once or over time.
• The annuitant gets his/her money on a set of dates; it could be now or even in the future. The money can be paid once a month, once a year, three times a year, or even all at once.
• Several factors remain in the payoff, which also includes the length of the receiving annuity.
• People can choose to be paid an annuity for a period, or they choose to be paid for the rest of their lives every month.
• The size of a payout also depends upon if a person invested in making the annuity as a fixed one with a guaranteed payout amount, or an annuity where investments link to its making''s.

What is an Annuity Calculator?

The annuity calculations help the investor in establishing the amount to put in during the accumulation period of the benefits and have the correct amount of money after their venture. Since the payout is an applicable benefit plan and only happens to assets, in some businesses, it is also known as the retirement planning and pension plan estimator.

Who Should Buy an Annuity Plan?

If you wish for an assured lifelong income, you may need to invest in an annuity plan more than you may do so after retirement. The idea behind subscribing to the annuity plan is to make you self-reliant at that moment when you eventually stop working and your normal income comes to an end. The corpus returned by the annuity plan can be utilized for funding day-to-day expenses in retirement and pursuing other post-retirement goals like traveling, setting up a business, pursuing a hobby, or any other woe.

What Is The Best Time To Purchase An Annuity Plan?

With an annuity plan, you can start saving whenever it''s convenient for you. You may have amassed so much money as retirement approaches that you may want it to start working. There are some annuity plans which allow you to spend a sum of money and then you can start getting the payments as early as a year from the date of purchasing the annuity. Alternatively, you can start getting cash at later stages in your life.

If you are just beginning to make money, you may want to be in a position to throw small amounts into your annuity plan on a regular basis to test how it works. With some annuity plans, you can opt to spend regularly and begin to receive money in later years for your retirement, so that you can spend a little. Putting money into an annuity plan as early as possible is a good option.

There you go! Hope you now have a clear understanding of annuity.

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