Definition:
A pension or annuity plan is an investment-led life insurance policy that helps policyholders to accumulate money over the investment years that provides for a comfortable retirement. Under this policy, the insured receives an income after retirement.
Description:
An annuity or retirement plan is a contract between the life insured and the insurance company designed to create a financially healthy retirement life for the policyholder. The life insured pays a premium to keep the policy in force and in return the insurer makes lumpsum or periodic payouts after the policyholder reaches the retirement age
This financial product provides guaranteed¹ regular income for the rest of the retired life. The premium paid by the policyholders is further invested by the life insurance company to generate returns. The investment corpus keeps on increasing throughout the investment years, and once the policyholder reaches the retirement age the pension payout begins.
In addition, the pension plan provides life coverage. If the life insured passes away during the policy term, the nominees receive the death claim amount. If the life insured reaches the retirement age then they become entitled to receive regular disbursement.
Annuity plans can be purchased with a regular premium payment option or at a single purchase price. Let us understand better with an example.
Example:
Suman(aged 45) works in an MNC and is the primary breadwinner for the family. His spouse is a housewife and his two kids are in school. As Suman is in his mid 40s he wanted to plan for a comfortable retired life by investing a part of his savings in an annuity plan. So he purchased a single payment annuity plan with Rs. 7.69 lakhs which will pay him an annual annuity amount of Rs. 50,913 every year for whole life after retirement.