Find Peace of Mind with Annuities
Buying peace of mind in a volatile and uncertain world might appear a contradiction in terms.
But it is possible to do that by buying annuities and addressing some financial worries.
Annuities are a popular investment scheme designed to provide a steady income stream to the investor.
Who provides the income?
Usually, an insurance company. It involves a contract between an investor and an insurance company, where the investor makes a lump sum payment to the insurer.
In return, the insurer agrees to make regular payments to the investor for a specified period.
The box below shows the type of annuities. Annuitants choose the annuity based on the periodicity, nature of the annuity and the treatment of the principal.
TYPE OF ANNUUITIES
There are three type of annuities:
- On Start Time Of Annuitiy
- On How The Amount Is Paid
- On How Long Annuitiy Is Paid
Based On Annuity Start Time
Deferred Annuity: A deferred annuity product is characterized by a pre-established time gap between the accumulation of premiums and the eventual payouts to the subscriber. This time gap is commonly referred to as the "accumulation time" in insurance terms. During this period, the subscriber is required to pay premiums and only becomes eligible for annuity payouts after the accumulation time has elapsed.
Immediate Annuity: In contrast to a deferred annuity, this mode involves the payment of a fixed lump sum percentage as the premium by the subscriber. The subscriber becomes eligible to receive payouts immediately after the payment of this lump sum amount.
How The Amount Is Paid?
Guaranteed: A guaranteed annuity offers a fixed pension amount for the chosen period or until death, with no possibility of change.
Variable: Here, the returns on your investments are linked to the market. It offers the flexibility to choose the asset class you want the funds to be invested, but shifting the allocation could come at a cost.
How Long Annuity Is Paid?
The third category is based on how long the annuity is paid and what happens to the principal amount after the term. Here are some of the modes of annuity payment based on periodicity.
Lumpsum: A lump-sum annuity, as the name suggests, has the option of a one-time, lump-sum payout. This means that depending on the terms and conditions, a subscriber can withdraw a lump-sum amount (usually a set percentage of the entire corpus) after a particular time.
Life Annuity: Guaranteed pension till the end of life.
Return Of Purchase Price: Here the principal is paid back to the survivor on completion of the term or to the nominee on death of the annuitant. The other types are payment of annuity for joint holders and then the survivor; and annuity to the principal holder and then to spouse on death.
Who Should Buy Annuities?
Annuities can be a great investment option for those who are looking for a steady stream of income in their retirement years. Here are some scenarios when one should consider buying an annuity plan:
Planning for Retirement: Annuities are a good investment option for those who are planning for retirement and want to ensure a reliable source of income in their retirement years. An annuity can provide a steady stream of income for a specified period.
Inheriting a Lump Sum: If you have inherited a lump sum of money, you may want to consider investing in an annuity. An annuity can help you turn that lump sum into a regular stream of income over a specified period.
High-Interest Rates: In the current high-interest rate environment, fixed annuities are a viable investment option. This is the time to secure fixed annuity plans, as insurance companies may offer higher guaranteed returns.
Longevity Risk: Annuities can also be a suitable investment option for individuals concerned about longevity risk. Longevity risk is the risk of outliving your savings in retirement. An annuity can provide a dependable source of income for a specified period, helping to reduce the risk of running out of savings during retirement.
Like all financial products, annuities may be appropriate for some but not suitable for everyone. Before making any investment decisions, it's essential to consult a financial advisor to determine whether an annuity is the right investment strategy for you.
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