Deferred Annuity Plan
Deferred annuity plan is designed specifically for your retirement; you receive fixed income from the date you have chosen at the time of applying this plan. This plan allows you save money at your earing years and earn income at your retirement years.In regular pay deferred annuity plans, you pay premiums for a certain number of years and, depending on the plan option, may or may not have to wait for a certain period post which your income begins and continues for life. In Single pay deferred annuity plans, this premium is paid by you all at once post which your income begins after a certain waiting period also known as deferment period. Depending on the plan you choose, you may invest money in the plan monthly, half-yearly, yearly or all at once as per your convenience.
Pros and Cons
PROs
- Guaranteed Post retirement Income
- Compounding Power: The Payout in deferred annuity plan is higher because during the accumulation (deferment) period of a deferred annuity, the invested amount grows through compound interest. The longer the deferment period and the earlier you start, the more your investment benefits from compounding, leading to a larger corpus at the time payouts begin.
- Flexible premium and payout options: You can choose to pay premiums monthly, quarterly, yearly, or as a lump sum. Payouts can also be structured as monthly, quarterly, or annual income.
- Customizable Deferment Period: You can select when you want your income to begin, aligning with your retirement goals and needs.
- Tax Benefits on Contributions: Premiums paid are eligible for tax deductions under Section 80C of the Income Tax Act, and earnings grow tax-deferred until withdrawal.
- Death Benefit Option: Many deferred annuity plans return the purchase price or accumulated value to your nominee if you pass away before annuitization.
CONs
- Low Liquidity and Surrender Charges: premature withdrawals are difficult and attracts hefty charges
- Taxation on Payouts
- Complexity: Deferred annuity contracts can be complicated, with various terms, fees, and options that may be hard to understand without expert guidance.
- Investment Risk (for Variable Annuities): If you choose a market-linked (variable) deferred annuity, your returns are subject to market risks and may not be guaranteed.
- Inflexibility: Once purchased, it is difficult to alter the terms, change the payout structure, or access the funds before the payout phase begins.
- Potentially High Fees and Charges: Some plans come with high management fees, commissions, and other charges, which can erode your returns over time.
Eligibility Criteria
- Minimum Entry Age: 30 years (completed) for most plans. Some insurers allow 30–40 years.
- Maximum Entry Age: 79–85 years (varies by plan and option). Some options allow up to 100 years.
- Minimum Purchase Price: ₹1,50,000 (subject to minimum annuity payout; lower for NPS/Divyangjan cases).
- Maximum Purchase Price: No limit
- Minimum Deferment Period: 1 year.
- Maximum Deferment Period: 12–20 years (subject to maximum vesting age; varies by plan).
- Minimum Annuity Payout: ₹1,000/month, ₹3,000/quarter, ₹6,000/half-year, ₹12,000/year.
- Joint Life Option: Allowed between lineal family members or spouse/siblings.
Terms and conditions
- Annuity Options
- Single Life Deferred Annuity: Payouts are made as long as the annuitant is alive.
- Joint Life Deferred Annuity: Payouts continue as long as at least one of the two annuitants (e.g., you and your spouse or a lineal family member) is alive.
- Premium/Purchase Price
- Minimum Purchase Price: Typically, ₹1,50,000, subject to minimum annuity payout. Lower limits apply for NPS proceeds or if purchased for a Divyangjan (person with disability).
- Maximum Purchase Price: No upper limit.
- Premium Payment Modes: Single pay (lump sum) or regular/limited pay (monthly, quarterly, yearly, etc.), depending on the plan.
- Deferment Period
- Minimum: 1 year.
- Maximum: 10–20 years, subject to maximum vesting age (commonly 80 years).
- Vesting Age
- Minimum: 31–45 years (varies by insurer).
- Maximum: 80 years.
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- Annuity Payout
- Modes: Yearly, half-yearly, quarterly, or monthly, always paid in arrears (after the period ends).
- Minimum Annuity: ₹1,000/month, ₹3,000/quarter, ₹6,000/half-year, ₹12,000/year.
- Surrender Value
- Allowed only under specific options: For example, LIC allows surrender after 3 months from policy issue or free-look period, but only for certain annuity options.
- On surrender: Policy terminates and all other benefits cease. Surrender value depends on age, policy duration, and other factors.
- Death Benefit
- During Deferment Period: If the annuitant dies, the nominee receives the higher of:
- Purchase Price plus accrued guaranteed additions minus any annuity paid, or
- 110% of Purchase Price.
- After Deferment Period: On death, annuity payments stop and the nominee receives the death benefit as defined above.
- Joint Life Provisions
- Joint life annuity can be taken with spouse, lineal ascendants/descendants (parents, children, grandparents, grandchildren), or siblings.
- Special Provisions for Divyangjan
- Lower minimum purchase price and relaxed age criteria if plan is for the benefit of a dependent person with disability (Divyangjan).
- Loan Facility
- Some plans allow loans after a certain period, subject to terms.
- Policy Alterations
- Once the annuity option is chosen and the policy is issued, it cannot be changed.
- Free-Look Period
- Policyholder has a 15-day (30 days for online) period to review and return the policy if not satisfied, with refund subject to deductions.
Scenarios where benefits get declined in case of Unfortunate event:
- No Death Benefit Option Chosen
- If you select an annuity option that does not include a death benefit, no payout is made to the nominee upon death after the deferment period.
- For example, in some plans, after the deferment period, if you have chosen a “pure life annuity” (no return of purchase price or premium), no death benefit is payable after the annuitant’s death; the policy simply terminates.
- First Death in Joint Life Annuity (Certain Options)
- In joint life annuity options, no death benefit is paid on the first death; the annuity continues to the surviving annuitant. Only after the last survivor’s death is the death benefit (if any) paid, depending on the chosen option.
- Paid-up or Lapsed Policies
- If the policy becomes paid-up or lapses due to non-payment of premiums, the death benefit is reduced or may not be available, depending on the policy’s paid-up value and terms.
- Exclusions and Minimum Annuity Amounts
- If the death benefit amount is too small to meet the insurer’s minimum annuity or payout requirements, the insurer may pay the amount as a lump sum rather than as an annuity, or may decline to annuitize the benefit.
- Some plans may have exclusions (such as suicide within the first year) or other specific conditions under which the death benefit will not be paid, though these are rare in annuity contracts compared to pure life insurance.
- During Survival (No Event)
- No benefit is paid if the annuitant survives: During the deferment period, if the annuitant is alive, no payout is made. Death benefits are only triggered by death during the deferment period or as specified after the deferment period.
- After Deferment Period (Certain Options)
- For some annuity options, after the deferment period ends and annuity payments have started, there may be no death benefit (for example, in “Life Annuity Only” options).
How to avoid such scenarios:
- Choose an Option with Death Benefit: Always select an annuity option that provides a death benefit or return of purchase price. Review product brochures for “return of premium” or “return of purchase price” features to ensure nominees will receive a payout after the annuitant’s death.
- Joint Life Annuity: Understand Payout Structure: For joint life plans, carefully review whether the chosen option specifies payout on first or second death. Select options that offer a benefit after the first death if needed, or ensure coverage aligns with your beneficiaries’ needs.
- Keep Policy Active: Pay premiums regularly to avoid lapsing or creating a paid-up policy. Mark calendar reminders for due dates or arrange auto-debit payment mandates to ensure uninterrupted coverage.
- Confirm Minimum Payouts and Avoid Exclusions: Check policy documents for minimum annuity/payout thresholds and any exclusions. Ask your insurer or advisor for written clarification on covered scenarios and conditions under which death benefits can be declined.
- Fully Disclose Health and Personal Details: Accurate disclosure of personal details (such as age, health status, and nominee details) during application helps avoid claim rejection due to misrepresentation.
- Choose Plan Options Carefully: Understand what happens after the deferment period—choose “life annuity with return of purchase price” or similar for continued death benefit. Avoid “life annuity only” if nominee benefit is important.
- Review Policy Exclusions: Read the fine print for exclusions (e.g., suicide within first year, criminal acts, undisclosed health issues) and ask for an explanation from the insurer.
