Factors to consider before choosing an annuity

Annuities offered by life insurance companies vary widely on the amounts that are given out and the period for which it is given. Unless you take cognisance of the various factors – age of commencement, frequency of annuity, option of commutation and the type of annuity – that influence these payments, you may end up making the wrong choice.

Age of commencement

This is generally decided at the time of joining the scheme or purchasing the annuity policy. In a superannuation scheme, the age of superannuation decides the date of commencement of annuity. In an individual policy, the term of the policy decides the date of commencement. However, for an immediate annuity purchased through lump-sum payment, the commencement can be postponed. At a higher age, remember that the annuity rate is higher.

As the frequency of payments increase, the amount of annuity will come down. What is important to remember is annuity payments start at the end of the chosen mode. That is, if annual payments are opted, the first instalment will reach you at the end of one year. In case of monthly mode first instalment will be paid at the end of one month (and not immediately).

Commutation

When savings accumulate over a period to a bigger sum, you are given an option to commute a portion of the accumulated value just before commencement of the annuity. Generally, this is at one-fourth or one-third of the accumulated amount. However, depending on the scheme/plan/company these percentages may vary.

Type of annuity

If you opt for commutation, remember that the accumulated value will come down and consequently annuity amount will be proportionately lesser. Hence, unless you have an immediate need for the lump sum money, it is better not to choose this option.

Annuities may be a life annuity, an annuity certain (for five, ten, fifteen or twenty years) or annuity for life with return of capital. There can be variations to the abovementioned options. In a ‘life annuity’, the amount contained in each instalment is quite high and inviting.

But do remember that if you take a life annuity, nothing is payable to your dependents on your death. Annuity is paid till the death of the annuitant whether he dies in a month’s time after commencement or he lives on for another fifty years.

Annuity certain for ‘x’ number of years means annuity is certain for that many years and thereafter, for as long as you live.

For example, say A opts for an annuity certain for fifteen years and survives another 27 years. He will continue to get annuity for all those years. But say he dies after four years. In that case, his dependent will receive annuity for another eleven years, after which the annuity will cease. But no capital is returnable to anyone. You must remember that every guarantee comes with a price. If ‘life annuity’ at 60 years of age for a purchase price of Rs 1,000 is Rs 93.50, the ‘annuity certain’ (15 years) is lower, at Rs.87.90.

In ‘annuity for life with return of capital’ you will gets annuity throughout your life. On death, the capital used to purchase the annuity is returned to the nominee.

This is another type of guarantee, the cost of which is quite high. Taking the same parameters of the example discussed above, the annuity rate for this option is Rs.71.10 (Jeevan Akshay VI figures are used in the examples).

Similarly, other schemes offered include joint annuities and increasing annuities, for life. You need to make the right choice after understanding how much you need in the evening of your life and in that light, the relevance of the options offered by the insurer.

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