Making the right choice

Last Updated: Thu, Dec 02, 2010 19:51 hrs

The insurance regulatory body makes it mandatory for investors to buy an annuity with two-thirds of the corpus.

Purchasing an annuity plan has become a necessity for consumers. The Insurance Regulatory and Development Authority’s recent guidelines on pension plans made it mandatory for investors to buy an immediate annuity with two-thirds of the corpus.

Similarly, the New Pension Scheme requires the person to buy an immediate annuity plan with 40 per cent of the corpus, when he or she decides to redeem the investment.

"You cannot break an annuity investment to get the capital back. This helps to instill discipline and secures a long-term income option. In addition, annuity is not subjected to interest rate risks, which can affect fixed deposits and monthly income schemes (MIS)," says Rituraj Bhattacharjee, head-products, Bajaj Allianz Life Insurance.

However, choosing an annuity plan can be confusing, as the amount of payout differs from company to company and there are many variants of the scheme.

Here are a few plans that you can look at, depending on your situation.

Sufficient retirement planning
If you are looking for an additional income through annuity, after allocating funds to a senior citizen savings scheme and MIS, and also to a sufficient health insurance, you can consider a life annuity. This plan gives out the maximum payout.

If you buy an annuity at 58 and choose the monthly payout option, you can receive 0.4-0.8 per cent of the capital, depending on the insurer. For a corpus of Rs 1 crore, Bajaj Allianz Life Insurance pays Rs 72,190 and Aegon Religare Life Insurance offers Rs 43,892 each month.

Absence of a contingency plan
In case you have not sufficiently allocated for a contingency, such as a health problem, or if you think your monthly pension money will not be able to match the growing inflation rate, a few life insurance players have a product called increasing annuity. For example, Life Insurance Corporation of India has a plan where the amount increases at a simple interest rate of three per cent each year.

If your spouse is a dependant, opt for a plan wherein your spouse continues to receive a payment even if you are no longer around. Called joint life, the plan pays the partner for their life span. However, the payout comes down when the primary annuity holder passes away.

Say, a 58-year-old has a partner aged 53 and a corpus of Rs 1 crore. If he buys a plan where his partner continues to receive the money from Aegon Religare Life Insurance, he gets a monthly income of Rs 33,983. In case of a life annuity plan, the insurer pays him Rs 43,892 a month.

Disabled or a minor dependant
The above-discussed options do not return the capital to the nominee on the death of the annuity holder. In case the pensioner has a dependant who is disabled or a minor, he can go for a plan called annuity with return of purchase price. This plan allows the person to leave the entire capital for the nominee after his demise. However, the regular payout is the least compared to all the other options.

"Most people prefer to buy a plan that gives the capital back to the nominee in the event of their death," says K S Gopalakrishnan, chief financial officer and appointed actuary, Aegon Religare Life Insurance. However, such a plan comes with a cost. The amount of payout decreases as the insurance companies have to give back the capital.

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