DIFFERENT TYPES OF ANNUITY PLANS OR

PENSION PLANS
An annuity is an insurance product that pays out income, and can be used as part
of a retirement strategy. Annuities are a popular choice for investors who want to
receive a steady income stream in retirement. Here's how an annuity works: A
person makes an investment in the annuity, and it then makes payments to him
on a future date or series of dates. The income he receives from an annuity can
be doled out monthly, quarterly, annually or even in a lump sum payment.
The size of payment is determined by a variety of factors, including the length
of payment period. A person can opt to receive payments for the rest of his life,
or for a set number of years. How much he receives depends on whether he opts
for a guaranteed payout (fixed annuity) or a payout stream determined by the
performance of his annuity's underlying investments (variable annuity). While
annuities can be useful retirement planning tools, they can also be a lousy
investment choice for certain people because of their notoriously high expenses.
Financial planners and insurance salesmen will frequently try to steer seniors or
other people in various stages toward retirement into annuities. Anyone who
considers an annuity should research it thoroughly first, before deciding whether
it is an appropriate investment for someone in their situation.
The evolution of annuity has been long and continues as part of actuarial
science.

Ulpian is credited with generating an actuarial life annuity table between AD

211 and 222. The early practice for selling this instrument did not consider the
age of the nominee, thereby raising interesting concerns.
The modern approach to resolving the difficult problems related to a larger
scope for this instrument applies many advanced mathematical approaches, such
as stochastic methods, game theory, and other tools of financial mathematics.
A life annuity is an annuity, or series of payments at fixed intervals, paid while
the purchaser (or annuitant) is alive. A life annuity is an insurance product
typically sold or issued by life insurance companies. Life annuities may be sold
in exchange for the immediate payment of a lump sum (single-payment annuity)
or a series of regular payments (flexible payment annuity), prior to the onset of
the annuity.
The payment stream from the issuer to the annuitant has an unknown duration
based principally upon the date of death of the annuitant. At this point the
contract will terminate and the remainder of the fund accumulated is forfeited
unless there are other annuitants or beneficiaries in the contract. Thus a life
annuity is a form of longevity insurance, where the uncertainty of an individual's
lifespan is transferred from the individual to the insurer, which reduces its own
uncertainty by pooling many clients. Annuities can be purchased to provide an
income during retirement, or originate from a structured settlement of a personal
injury lawsuit.
A person usually has two phases of investment; the accumulation phase
and the distribution phase.

Accumulation phase : This is the phase when a person earns money

and accumulates wealth. During this period he tends to invest in various
kinds of investment plans like mutual funds, stock market, securities,
bonds, life insurance, pension plans etc.

Distribution phase : This is the phase when he tends to consume the

wealth he has already accumulated for consumption purpose. This is
usually when he has retired from his job. He starts taking out certain amount
per month for next N years. Some of them might start withdrawing money
even before retirement.

Hence as pension or annuity plans are designed to generate regular income for
individuala once they reire, Insurance companies offer various pension plans
(also called as retirement plans or annuity plans) where a person has to initially
invest either a lump sum amount or regular annual installments/ premiums over
a period of time in return for regular income either for life or for fixed number
of years depending, upon the plan
IMPORTANCE OF ANNUITY OR PENSION PLANS IN INDIA:

1. Decline in joint family system : In India parents relied on their children to

take care of them after their retirement. However, this convention has
undergone a sea of change in the past few decades. The skilled, semiskilled and the unskilled labor prefer to or are forced to work in cities
where they get better employment opportunities and have to leave their
parents in 'empty nests'. This has increased the need to invest in pension
plans.

Reduced Dependency : Besides, if a person accumulates sufficient

wealth for his retirement, he can lead the same kind of lifestyle he lived
before his retirement, without being dependent on anyone. If his children
are unable to support him, he would be able to rely on pension.

Increase in life expectancy : Recent surveys reveal that the life

expectancy of people in India has increases by 4.5 years in the past few
years. So in order to provide for himself during you old age, he needs to
invest in pension plans.

Increase in aging population : Although India is said to be a country

with a huge young population, this will not be the same after a few
decades. This generation will age and will need to provide for themselves.
Although life insurance provides coverage for a person and his
dependents in case of an occurrence of an eventuality like death, pension
plan provides him coverage if he has to survive his old age without
depending financially on anybody. The main reason for this is that he may
not be able to support for himself financially after a certain age. It is then
that his pension plans will help him.

TYPES OF PENSION PLANS:

There are different types of pension plans. It would depend
on how much you earn today and how much you would like
to invest in pension plans, apart from other types of
investments.
BASED ON TIMING OF PAYOUT :
1. DEFERRED ANNUITY PLAN:
As the name suggests, the pension is not paid immediately after a person
retires, but it is delayed till the time a person plans to retire. A person
pays a fixed amount as premium and the wealth accumulated is kept aside
till a person retires. A person gets money back in regular installments
every month.
In a deferred annuity, a person typically receives payments starting at some
future date, usually at retirement. Those funds grow tax-deferred until a person
is ready to begin receiving payments. However, most deferred annuities allow
for systematic withdrawal payments beginning thirty days after the purchase of a
personr annuity, up to 10% per year, in most cases. Deferred annuities make up
a large majority of all annuity sales, and are the type of annuity that is generally
recommended if a person does not need immediate income.
There are two phases for a deferred annuity:

the accumulation or deferral phase in which the customer deposits (or

pays premiums) and accumulates money into an account;

the distribution or annuitization phase in which the insurance company

makes income payments until the death of the annuitants named in the contract
One can see deferred insurance plans all over the market. Some examples are
LIC Jeevan Tarang, LIC Jeevan Nidhi, New Pension Scheme (NPS), Bajaj
Allianz Swarna Raksha.
Deferred annuities grow capital by investment in the accumulation phase (or
deferral phase) and make payments during the distribution phase. A single
premium deferred annuity (SPDA) allows a single deposit or premium at the
issue of the annuity with only investment growth during the accumulation phase.
A flexible premium deferred annuity (FPDA) allows additional payments or
premiums following the initial premium during the accumulation phase.
Sometimes there is a life insurance component added so that if the annuitant dies
before annuity payments begin, a beneficiary gets either a lump sum or annuity
payments.
DISADVANTAGES OF DEFERRED ANNUITY PLANS:
There are better options for growth of persons wealth
No predictable returns for annuity
Not flexible
High charges

2. IMMEDIATE ANNUITY PLAN:

In an immediate annuity, the investor begins to receive payments immediately

upon investing. This is for investors that need immediate income from their
annuity. When a person purchases an immediate annuity he can choose between
payments for a certain period of time (typically five to twenty years period
certain), payments for the rest of his life and/or his spouses life, or any
combination of the two. A person can even choose between a fixed payment that
doesnt vary or a variable payment that is based on market performance.
An annuity with only a distribution phase is an immediate annuity; such a
contract is purchased with a single payment and makes payments until the death
of the annuitant(s). These products are called immediate annuity plans because
they start paying a person the annuity right from the day he makes a lumpsome
payment. So if a person wants a monthly pension and has huge lumpsome
money, he can buy an immediate annuity plan and start getting pension. It is not
as popular as deferred annuity plans in India.
Examples are : LIC Jeevan Akshay, ICIC Pru Immediate Annuity, HDFC
Immediate Annuity
There are different types of plans that insurance companies offer. They
are as follows: (METHODS OF RECEIVING PENSION):

Guaranteed Period Annuity : As the name suggests, a person get a

certain amount of money for a fixed number of years as mentioned in the
pension plan. So if someone decides to buy this plan and get pension for
15 years, the money will be paid irrespective of the fact that the person
survives or not after this plan. For example, if the policy holder expires

after 10 years, the money will be given to the nominee for the next 5
years.(annuity certain and thereafter for life)

Annuity Certain : If a person buys this plan, a person will be paid a

fixed amount of money for a fixed duration. However, the best advantage
of this plan is that if a person surviv the plan a person would get pension
for as long as a person live. For example, a person invests in this plan and
is supposed to receive money for the next 15 years. If after 10 years, he
dies the nominee will get the pension for the next five years and then the
pension will stop.

Life Annuity : If a person opts for this plan, a person will get
pension for as long as a person live. If the person dies, then the nominees
will get the purchase price of the annuity. The purchase price here means
the assured amount to be received on maturity, plus the bonus.
A pure life annuity ceases to make payments on the death of the annuitant.
A guaranteed annuity or life and certain annuity, makes payments for at least a
certain number of years (the "period certain"); if the annuitant outlives the
specified period certain, annuity payments then continue until the annuitant's
death, and if the annuitant dies before the expiration of the period certain, the
annuitant's estate or beneficiary is entitled to collect the remaining payments
certain. The tradeoff between the pure life annuity and the life-with-periodcertain annuity is that in exchange for the reduced risk of loss, the annuity
payments for the latter will be smaller.

BASED ON LIQUIDITY OPTIONS:

1.ANNUITIES WITH WITHDRAWAL PENALTIES:

No-surrender annuities allow a person to withdraw either his interest earnings

or up to 15% per year without a penalty (although any withdrawal from an
annuity may be subject to taxes and a 10% federal penalty if taken prior to 59
years of age). Beyond that, most annuities have a surrender charge ( a penalty
for making an early withdrawal above the free withdrawal amount). Typically
this surrender charge decreases over a seven-year period.

2. ANNUITIES WITHOUT WITHDRAWAL PENALTIES:

For investors who may need spur-the-moment access to their money, there are
annuities without surrender charges (no-surrender or level load annuities)
these annuities have no penalty or charge for early withdrawal. No-surrender
annuities do not come with bonuses, and some insurance companies charge
higher fees for their no surrender charge products. Most companies now offer
no-surrender annuities. However, if a person is asking a local broker or agent for
their recommendation they may not share about the no-surrender annuity, as
these annuities pay the broker a much lower fee. Some agents will even try to
steer the investor to annuities with surrender charges but without bonuses.
BASED ON INVESTMENT TYPE:
1. FIXED ANNUITY:
Annuities that make payments in fixed amounts or in amounts that increase by a
fixed percentage are called fixed annuities. In a fixed annuity, the insurance
company guarantees the principal and a minimum rate of interest. In other
words, as long as the insurance company is financially sound, the money a
person has in a fixed annuity will grow and will not drop in value. The growth of

the annuitys value and/or the benefits paid may be fixed at amount or by an
interest rate, or they may grow by a specified formula. The growth of the
annuitys value and/or the benefits paid does not depend directly or entirely on
the performance of the investments the insurance company makes to support the
annuity. Some fixed annuities credit a higher interest rate than the minimum, via
a policy dividend that may be declared by the companys board of directors, if
the companys actual investment, expense and mortality experience is more
favorable than was expected. Fixed annuities are regulated by state insurance
departments.
TYPES OF FIXED ANNUITIES:
An equity-indexed annuity is a type of fixed annuity, but looks like a
hybrid. It credits a minimum rate of interest, just as a fixed annuity does,
but its value is also based on the performance of a specified stock index
usually computed as a fraction of that indexs total return.
A market-value-adjusted annuity is one that combines two desirable
featuresthe ability to select and fix the time period and interest rate over
which a personr annuity will grow, and the flexibility to withdraw money
from the annuity before the end of the time period selected. This
withdrawal flexibility is achieved by adjusting the annuitys value, up or
down, to reflect the change in the interest rate market (that is, the
general level of interest rates) from the start of the selected time period to
the time of withdrawal.
2. VARIABLE ANNUITY:
A variable annuity is a contract between a person and an issuer whereby a
person agrees to give the issuer principal and in return the issuer guarantees
person variable payments over time. While annuities are not insurance policies,
they are issued by insurance companies. Variable annuities are different than

their fixed annuity cousins, which are invested primarily in government

securities and high-grade corporate bonds, and offer exclusively a guaranteed
rate, typically over a period of one to ten years. Variable annuities enable a
person to invest in a selection of portfolios, called sub-accounts. These subaccounts are tied to market performance, and often have a corresponding
managed investment after which they are modeled. Available choices range
from the most conservative, such as money market, guaranteed fixed accounts,
and government bond funds, to more aggressive such as growth, small cap, mid
cap, large cap, capital appreciation, aggressive growth, and emerging markets
investments. A person can invest in fixed accounts, money market, domestic,
international, specialty, sector funds and small, medium and large cap funds.
Some have as many as forty or more investment choices with ten or more
managers, and allow a person to switch between them at no cost and without
taxes .
Unlike mutual funds, variable annuity products come with optional living
benefits and death benefits. One special type of variable annuity benefit is the
GMIB (Guaranteed Minimum Income Benefit). The most competitive
GMIBs guarantee at least a 5% return over seven years, or the highest attained
value on each anniversary during the surrender period, whichever is greater. In
exchange for this living guarantee, the living benefit annuity has a surrender
charge / penalty for early withdrawal (typically 7 years), no up-front bonus, and
a slightly higher annual fee (.25% to .50% per year).
ADVANTAGES OF VARIABLE ANNUITY:
Greater variety of investment options
Taxation on investment growth is deferred

 Proceeds are paid to a named beneficiary

DISADVANTAGES OF VARIABLE ANNUITY:
Often carry high fees and expenses due to insuance and contract charges
Tax deferred growth will ultimately be taxed to the one in higher tax
bracket
Guarenteed death benefits generate mortality charges that reduce
investment return.

OTHER CLASSIFICATION OF ANNUITIES:

SINGLE PREMIUM ANNUITY:
A single premium annuity is an annuity funded by a single payment. The
payment might be invested for growth for a long period of timea single
premium deferred annuityor invested for a short time, after which paa persont
beginsa single premium immediate annuity. Single premium annuities are
often funded by rollovers or from the sale of an appreciated asset.
FLEXIBLE PREMIUM ANNUITY:
A flexible premium annuity is an annuity that is intended to be funded by a
series of payments. Flexible premium annuities are only deferred annuities; that
is, they are designed to have a significant period of payments into the annuity
plus investment growth before any money is withdrawn from them.

JOINT ANNUITY:
Joint-life and joint-survivor annuities make payments until the death of one or
both of the annuitants respectively. For example, an annuity may be structured to
make payments to a married couple, such payments ceasing on the death of the
second spouse. In joint-survivor annuities, sometimes the instrument reduces the
payments to the second annuitant after death of the first.
IMPAIRED LIFE ANNUITY:
There has also been a significant growth in the development of impaired
life annuities. These involve improving the terms offered due to a medical
diagnosis which is severe enough to reduce life expectancy. A process of
medical underwriting is involved and the range of qualifying conditions has
increased substantially in recent years. Both conventional annuities and
Purchase Life Annuities can qualify for impaired terms.
INDIVIDUAL ANNUITY:
Individual annuities are insurance products marketed to individual consumers.
With the complex selection of options available, consumers can find it difficult
to decide rationally on the right type of annuity product for their circumstances
CONTINGENT ANNUITY:
It is anarragement in which the beneficiary does not begin receiving payments
until a specified event occurs. A contingent annuity may be set up to begin
sending payments to a beneficiary upon the death of another individual who
wishes to ensure financial stability for the beneficiary, or upon retirement or
disablement of the beneficiary.