A woman from Kolar was denied over Rs 3.6 lakhs which her late husband had invested in a life annuity scheme, despite her being the nominee, The insurance company had cited the ‘No Death Benefit’ clause and while she took the matter to a Bangalore consumer court, the case was dismissed. The consumer forum noted that although the annuity option was life annuity, there was no death benefit attached to the policy. Read More
An annuity is an investment product sold by insurance companies or other financial institutions to hold and grow funds. The annuity is essentially a written contract between you and the firm. When you annuitize, you invest a certain amount with the company and then accept a payout stream that can either begin immediately OR in the future. The payouts can be for life or a certain number of years. Annuities are mainly used to provide steady income during retirement.
It is important for annuitants to understand what they are availing in different types of annuities.
Annuity for life
Under this option, the annuity payments will be made in arrears for as long as the Annuitant is alive. The annuity payments will cease on the death of the Annuitant.
Death benefit- Nothing shall be payable
Annuity guaranteed for X years and for life thereafter
Under this option, the annuity payments will be made in arrears for as long as the Annuitant is alive or until the end of the Guaranteed Period of X years, whichever is later.
Death benefit- If death occurs within X years, then annuity is payable to nominee till end of X years, After X years, nothing is payable.
Annuity for life with return of purchase price
Under this option, the annuity payments will be made in arrears for as long as the Annuitant is alive.
Death benefit- The annuity payments will cease on the death of the annuitant and the Purchase Price will be payable to the Nominee.
Annuity for life increasing at a simple rate of Y % p.a.
Under this option, the annuity payments will be made in arrears for as long as the Annuitant is alive. The annuity payment will be increased by a simple rate of Y% per annum for each completed policy year.
Death benefit- The annuity payments will cease on the death of the Annuitant.
Annuity for life with a provision for X% of the annuity to the spouse on death of the annuitant
Under this option, the annuity payments will be made in arrears for as long as the Annuitant is alive.
Death benefit- On death of the Annuitant, X% (can range from 50%-100%) of the annuity amount will be payable to the surviving named spouse as long as the spouse is alive. The annuity payments will cease on the subsequent death of the Spouse. If the Spouse predeceases the Annuitant, the annuity payments will cease upon the death of the Annuitant.
Annuity for life with a provision for 100% of the annuity to the spouse on death of the annuitant with return of purchase price on the death of last survivor.
Under this option, the annuity payments will be made in arrears for as long as the Annuitant is alive.
Death benefit- On death of the Annuitant, 100% of the annuity amount will be payable to the surviving named spouse as long as the spouse is alive. The annuity payments will cease on the subsequent death of the Spouse and the Purchase Price will be payable to the Nominee. If the Spouse predeceases the Annuitant, the annuity payments will cease upon the death of the Annuitant and the Purchase Price will be payable to the Nominee.
Annuity for life
Under this option, the annuity payments will be made in arrears for as long as the Annuitant is alive. The annuity payments will cease on the death of the Annuitant.
Death benefit- Nothing shall be payable
Annuity guaranteed for X years and for life thereafter
Under this option, the annuity payments will be made in arrears for as long as the Annuitant is alive or until the end of the Guaranteed Period of X years, whichever is later.
Death benefit- If death occurs within X years, then annuity is payable to nominee till end of X years, After X years, nothing is payable.
Annuity for life with return of purchase price
Under this option, the annuity payments will be made in arrears for as long as the Annuitant is alive.
Death benefit- The annuity payments will cease on the death of the annuitant and the Purchase Price will be payable to the Nominee.
Annuity for life increasing at a simple rate of Y % p.a.
Under this option, the annuity payments will be made in arrears for as long as the Annuitant is alive. The annuity payment will be increased by a simple rate of Y% per annum for each completed policy year.
Death benefit- The annuity payments will cease on the death of the Annuitant.
Annuity for life with a provision for X% of the annuity to the spouse on death of the annuitant
Under this option, the annuity payments will be made in arrears for as long as the Annuitant is alive.
Death benefit- On death of the Annuitant, X% (can range from 50%-100%) of the annuity amount will be payable to the surviving named spouse as long as the spouse is alive. The annuity payments will cease on the subsequent death of the Spouse. If the Spouse predeceases the Annuitant, the annuity payments will cease upon the death of the Annuitant.
Annuity for life with a provision for 100% of the annuity to the spouse on death of the annuitant with return of purchase price on the death of last survivor.
Under this option, the annuity payments will be made in arrears for as long as the Annuitant is alive.
Death benefit- On death of the Annuitant, 100% of the annuity amount will be payable to the surviving named spouse as long as the spouse is alive. The annuity payments will cease on the subsequent death of the Spouse and the Purchase Price will be payable to the Nominee. If the Spouse predeceases the Annuitant, the annuity payments will cease upon the death of the Annuitant and the Purchase Price will be payable to the Nominee.
Let us see a working example on some of the options mentioned above to get more clarity. Here, we have considered 45 years of Age of Annuitant at entry and the pay-out amount as per LIC’s Jeevan Akshay policy, which is the most preferred annuity product in the market.
| Options ---> |
Immediate Annuity for life |
Immediate Annuity guaranteed 10 years and life thereafter |
Immediate Annuity for life with Return of Purchase Price |
| Option 1 | Option 2 | Option 3 | |
| Purchase Price | 10,00,000 | 10,00,000 | 10,00,000 |
| Annuity Amount (Annual) | 67,950 | 67,550 | 57,950 |
| Death Benefit | NIL | NIL | 10,00,000 |
As a layman, Option 1 looks attractive since it provides the highest return per year. But, considering life expectancy the actual benefit which you reap from the product may bring you to a different conclusion.
Let us assume three scenarios of one’s life expectancy i.e. 30 Year survival, 10 Year survival and 5 Year survival and see the benefit from each of the options.
| Options ---> |
Immediate Annuity for life |
Immediate Annuity guaranteed 10 years and life thereafter |
Immediate Annuity for life with Return of Purchase Price |
| Option 1 | Option 2 | Option 3 | |
| Purchase Price | 10,00,000 | 10,00,000 | 10,00,000 |
| Annuity Amount (Annual) | 67,950 | 67,550 | 57,950 |
| Death Benefit | NIL | NIL | 10,00,000 |
| Total Benefit (30 Year Survival) | 20,38,500 | 20,26,500 | 27,38,500 |
| Total Benefit (10 Year Survival) | 6,79,500 | 6,75,500 | 15,79,500 |
| Total Benefit (5 Year Survival) | 3,39,750 | 6,75,500 | 12,89,750 |
Now, the outcomes are more interesting, increasing life expectancy. Option 1 looks the best with the highest annual pay-out if you are expecting to live a long time. However, factoring in the risk of loss of life, option 2 works better as it is guaranteed, while option 3 seems an all-rounder with no loss of capital.
Conclusion:
Annuities are designed to provide a steady cash flow for people during their retirement years and to alleviate the fears of outliving their assets. Since the accumulated assets may not be enough to sustain the current standard of living, most investors turn to a financial institution to purchase an annuity contract. Remember to ask these three questions before going for any annuity product.
Do I have any dependents? If yes, who are they?
Do I have a spouse?
My Age and Life Expectancy
In the above example, option 3 may have the lowest annual pay-out, but you get the pay-out till your life and your nominee will receive the entire purchase price upon your demise. Hence, it is very important to figure out answers to the above questions to determine which option works better depending on the annuitant’s requirement.
These financial products are appropriate for investors (annuitants), who want a stable, guaranteed retirement income. This invested cash is illiquid and subject to withdrawal penalties and therefore not recommended for younger individuals or for those who have higher liquidity needs. Always consult a financial advisor who can analyze your requirements and recommend the RIGHT products/options for you. As we have specified many times before, all of this flows from the asset allocation, which in turn flows from the financial goals that you have set.
These financial products are appropriate for investors (annuitants), who want a stable, guaranteed retirement income. This invested cash is illiquid and subject to withdrawal penalties and therefore not recommended for younger individuals or for those who have higher liquidity needs. Always consult a financial advisor who can analyze your requirements and recommend the RIGHT products/options for you. As we have specified many times before, all of this flows from the asset allocation, which in turn flows from the financial goals that you have set.
So if you need any further help on annuities.
Bibliography
How to go for the right annuity plan, TOMORROW MAKERS | Annuities: How to Find the Right One for You, INVESTOPEDIA | Retirement Basics: What Is An Annuity?, FORBES ADVISOR
