Taking Cover. Getting the best out of annuities

You may have put your life-time’s savings into an annuity scheme. But to ensure peace of mind and regular income flows for your family, the decision on how to receive money from the insurer is critical.

With life insurers presenting a host of repayment options, you must select one that suits your circumstances.

It becomes all the more important to make the right choice as, once you sign off on a specific alternative at the time of purchasing an annuity, you are generally not allowed to change it subsequently. It may sound great to hear that the life insurance company will give you an annuity till you live, which seems like a long time!

But what would ensue if, unfortunately, something were to happen to you within the first few years of the repayment period? The life insurance company would be under no obligation to pay any amount to your spouse after that, if you choose this option.

In effect, your spouse will have to do without any income from the annuity plan, though you may have put in a substantial proportion of your savings to buy a pension plan or an immediate annuity from the life insurer.

So, before you choose, keep the welfare of your dependants in mind. You can zero in on any other repayment options discussed below to provide for them beyond your life-time. Of course, if you are single and have no dependants, you can choose to receive it only for your life-time.

Another option is to opt for a payout for periods ranging from 5-20 years.

Obviously, you must choose the alternative that offers you the pension payout for the maximum period, especially if you retire early, say by 50-55.

Problems arise here if your spouse were to live for a substantially longer time after your demise. More so, in cases where the age difference between husband and wife is wide — say, 7-10 years.

To overcome the above shortcomings, there are annuity payment options where you will receive a payout till your life-time and your spouse will continue to receive the same amount till her/his time. One version of this is where your spouse will receive the ‘purchase price’ after your lifetime.

The ‘purchase price’ is the amount that you paid to take the annuity in the first place.

So, if you had taken an immediate annuity for ₹25 lakh, this amount would be given to your spouse after your time. The point here is that your spouse must have the financial acumen to be able to invest this lumpsum and derive a regular income from the investment.

There is another option that would allow even dependants other than your spouse to get some benefits out of the annuity product after his/her time. Under this, your spouse receives regular payouts till his or her life-time.

After this, your spouse’s nominees — your children, for instance — will receive the purchase price after your spouse’s death.

This alternative is very useful in case you wish to leave something for your children or other dependants.

As you seek to get more out of the annuity product, keep in mind that the payouts would reduce by up to 20-22 per cent in some cases. For example, if you were to take the LIC’s Jeevan Akshay VI (an immediate annuity plan) at the age of 60, you would get ₹9,350 as annual payout for a ₹1 lakh purchase price for a life-term annuity.

That amount reduces to ₹8,790 if you choose a payout period of 15 years. It gets further diminished to ₹7,110, if you choose the return of purchase price option.

In case you choose the option where your spouse would continue to receive the same amounts, the annual payout would be ₹8,030.But then, the reduction could be a welcome price to pay for a steady income stream for you and, beyond your lifetime, for your dependants.