What are the different kinds of annuities?

An annuity plan is a product offered by life insurance companies that give you fixed cash flow and primarily serve as an income source for retired people.

Annuity plans are developed by life insurance companies, governed by Insurance Regulatory and Development Authority of India (IRDAI), which accepts fund from people and invest them. When an individual retires, he issues a stream of cash flows in the form of a pension. The period prior to receiving regular cash flows is termed as the accumulation phase. Once cash flows commence, it is termed as annuitisation phase or even distribution phase. There are various kinds of annuity plans that are discussed below:

Deferred annuity

In deferred annuity plans, you pay premiums and build a corpus until a specified time period and then, you buy an annuity, which would give you fixed periodic payments post specified period.

Immediate annuity

In an immediate annuity, you have to pay the lumpsum to buy an annuity post which, you would be receiving the periodic payments that start immediately from the following period as per the payment frequency opted by you. The payment frequency available is monthly, quarterly, semi-annually, or annually.

Apart from the above broad types, there are also other types of annuity plans as listed below:

Life annuity: Annuity payments are made to you until your lifetime. However, after your death, the annuity payments stop.

Life annuity with return of purchase price: Annuity payments are made to you till your lifetime. However, on your death, the purchase price at which you bought the annuity is returned to your nominee.

Annuity certain: It’s a guaranteed annuity, where the annuity is paid for a guaranteed period, say 5 years, 10 years, 15 years, 20 years, etc. Once the guaranteed period is over, the payments are made till the time you are alive. If your death occurs during the guaranteed annuity period, the annuity payments will still continue. They will stop once your guaranteed annuity period is completed.

Increasing annuity: As the name suggests, the annuity payments increase every year or every frequency by a fixed rate. The increase can be at a simple rate of interest or compound rate of interest.

Joint life annuity: Annuity payments are made until the lifetime of the last surviving annuitant. This means that if the primary annuitant dies, the annuity payments won’t stop. They will continue for the lifetime of the secondary annuitant and vice-versa.

Joint life annuity with return of purchase price: It is similar to a joint-life annuity. The only difference is that in case of death of the last surviving annuitant, the annuity payments stop and the purchase price is returned to the nominee.