Insurance in its simplest definition is protecting oneself against future financial risk. Human life has two main risks; one is death and the other is living too long. Both risks have strong financial implications for one’s family and self and need to be planned for in advance. Life insurance offers solutions for these specific risks in the form of life cover solutions and annuity solutions.

Life cover protects an individual’s dependents from the financial implications of the loss of a breadwinner; where on the death of a policyholder the insurance company pays the nominee a sum assured in the lieu of the premiums paid. These solutions come in the form of pure term cover or savings linked insurance plans. While considering these policies it is important to select a sum assured value that can cover the liabilities and future expenses for the family.

Annuity, on the other hand, refers to pension solutions for an individual to tide through the retirement years i.e. to ensure financial protection during a phase of life when a person’s physical capacity to earn has reduced. The key factors to consider while looking for an appropriate annuity plan are the rise in inflation rates in the future along with the amount that would be needed maintaining a decent lifestyle and covering medical requirements if any.

It has been observed that a normal individual is usually preoccupied with planning for various immediate and near-future family needs and financial goals. However, in the process of making life decisions, creating a retirement corpus for the long term takes a back seat. Many individuals start to plan for retirement at a much later age with limited funds available. Thus the emphasis should be to incorporate annuity planning at a much earlier stage of life.

Annuity products come in different forms –

• A fixed annuity guarantees payment of a set amount for the term of the agreement. It cannot go down (or up).

• A variable annuity fluctuates with the returns on the mutual funds it is invested in. Its value can go up (or down).

• An immediate annuity where pension begins as soon as the buyer makes a lump-sum payment to the insurer.

• A deferred annuity where the pension begins after a set time frame of premium payment.

Annuity product key features –

1. Lifelong income – Annuity products ensure that you after your retirement, you receive income for as long as you live

2. Multiple options – The products offer several options such as the return of purchase price, guaranteed annuity for a certain period, increasing annuity,

3. Joint life – Joint life annuity makes sure that your financial dependent continues to receive payments after your death

4. Immediate or deferred income – If you wish to receive income immediately, an immediate annuity is the best option. And, if it is after a few years, the deferred annuity is the way to go

5. Receive income as per your convenience – You can receive annuity payments in monthly, quarterly, half-yearly, or yearly instalments

6. Tax benefits – the premium paid towards the annuity plan is eligible for tax deduction under section 80CCC of the Income Tax Act, 1961

How can annuities be made better?

Currently, income from the annuity is taxable. It would be far more beneficial for retired persons to not have to pay any tax on their annuity income as these payments come from the money they have saved over their lifetime, money that has been taxed previously.

India has a significant portion of its household population in the income category below Rs 5 lakh. A group where creating a significant retirement corpus is a challenge, thus focusing on creating solutions for this segment to encourage regular savings towards an annuity solution should be one of the key factors for a stable society.

For a country like India with a large youth population that would require retirement solutions, the annuity market and demand is steadily re-emphasising the need for individuals to include annuity in financial planning at an earlier stage.

The author is MD & CEO, Shriram Life Insurance