What are annuity plans?

Jul 9, 2019
I want to understand what annuity plans are. Can you give some examples and returns that they provide?
1 Answer
Jul 9, 2019

"An ‘Annuity’ is a (financial) product that provides a steady, periodic income, over many years,  to the buyer." This part of annuity makes it similar to a pension. In India, almost all the annuity plans are provided by life insurance companies.

In a way, annuity is the opposite of endowment insurance. You buy an annuity plan from the insurance company by paying a lumpsum.  (This is called 'purchase price'.)  The insurance company that pays you a specified amount every period - month, quarter, or year.

The 'popular' Jeevan Akshay VI from LIC is an annuity plan.  The newer Jeevan Shanti has more features - like deferring your annuity to start from a later date.  From the government, the Pradhan Mantri Vayu Vandan Yojana (PMVVY) is an example of an annuity plan - the one catch here is that annuity is paid for a maximum of 10 years.

The sellers and agents, particular when it comes to deferred annuity plans, mislead by quoting 'returns' of 9%, 10%, etc.  But for a true comparison, you should look at the annuity rate of a plan with a return of purchase price.  Typically these plans provide a yearly annuity of 70 to 80 rupees per 1000 of purchase price.  You can compare them with fixed deposit rates, and you would find them to be quite similar.  (The one issue with FD is that the maximum term is 10 years.  Annuity plans run for your life.)

You can find a longer description of annuity plans in this blog article:  Annuity Plans

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