All About Annuity

Annuity is nothing but a pension paid by the insurer in

exchange for a lump sum.

The Lump sum is known as the purchase price.

The amount of pension is determined by the age at which

we apply, the option we choose and also the purchase price.
This is done with the annuity rate.
When it comes to insurance, many of us have liking for LIC :
that is most likely related to deep rooted belief of we Indians
that LIC is the best.
So to make it more understandable have taken the example
of Jeevan Akshay VII : Annuity plan from LIC

Annuity is a umbrella of product with variety of options to

select. Whether to buy a annuity and what type of annuity
depends on exact financial state of giving individual.

Jeevan Akshay VII has 10 options to select from

Following are the explanations for each of the 10 options of
annuity available



Before even going to rate of pension offered by variety of
such options. Lets simply consider the following points and
then take a call.

Lets consider the following facts

1. Majority of us are in 3rd/4th decade of life ( age

30-50years)
2. Majority of us have Salaried income : Meaning our
monthly expenses are taken care off and we have some
amount of surplus every month left—-> this surplus can
be possibly committed to investment
3. Some of us have 2nd source of income : Rental income /
dividend /business income
4. Regular payouts from investment is not additional
income : Its just redemption of breaking of existing
investment : Specifically applicable to investment
offering fixed payouts like annuity / yearly payout
insurance plan
5. We still have 20-30 years of earning capability left and
we don’t need a regular payouts from our own
investment now

Lets quickly analyze the issues with annuity after

considering the above 5 facts

1. OPTION A of annuity plan: Immediate annuity for life !!!

Looks appealing isn’t it ?

One Pays a huge 1 time amount and every month one gets
fixed payout . Makes one feel happy !!!

Now the major drawback is : If the person dies 1 month/

1year/10 years after buying the annuity ——> The annuity
stops and the ORIGINAL amount is also lost

LIC will be waiting for the annuity buyer to die so that they
can have the whole amount to themself !!

GOOD for LIC and possibly for LIC share holders once LIC
is listed
2. OPTION B,C, D, E: Immediate annuity: Means one pays
a big amount once and next month onwards every month a
fixed amount is paid to annuity provider for the whole life. If
the buyer dies than the same fixed amount is paid for 5
years ( Option B) , 10 Years ( C), 15years( D), 20 years ( E)
option

So in these 4 options LIC just has to wait for buyer and

Nominee to die so that they can keep all the original amount
with them.

Double Dhamal for LIC : They were paying the monthly

payout which was lower than FD rate and all they need to
keep the original amount with them forever is wait for buyer
and nominee to die

Again GOOD for LIC and possibly for LIC share holders
once LIC is listed

3. Option F : Pension starts immediately every month for

rest of life and on the death of buyer the original amount is
paid to nominee

Now the monthly pension one receives : It will be added to

your income and taxed at your tax slab : Majority of us are in
30% tax bracket

LIC is paying the monthly pension which is lower than FD

rates ( Monthly payout FD ) and after that deduct 30% of
amount received

If it suites you : Please go ahead…..

I would wait for LIC to be listed : Its definitely profiting as the
payout is less than any FD rates

4. OPTION H : Immediate monthly pension for rest of life of

buyer of annuity. This Pension will increase by 3% every
year. Example if the monthly pension is 100 rs , 2nd year it
will be 103 rs/month , 3rd year it will be 106 rs/month

Looks extremely fabulous isn’t it ?

3% increase every year !!!!

Awesome for LIC too: All they need is wait for annuity buyer
to die and all the original amount is theirs !!!!!

5. Option I : Joint annuity with forfeit : Annuity or pension

will be continued to be paid to anyone or survivor and will
continue to receive till both of them die. Once both are
dead , LIC has the whole money to itself

I wish LIC is listed soon on pious Dalal street soon

6. Option J: Joint with return : Pension starts immediately

and is paid as long as anyone of the applicant are alive.
Once both die then the original amount is paid to the
nominee

Fair enough !!!

So get ready to add the monthly pension to your income and
pay taxes as per tax slab

After going through this , do not consider annuity is totally

bad and everyone should avoid. Annuity is no doubt good
option for some of us: But the decision to get pension out of
annuity should be decided when one is nearing retirement
and one needs monthly income to meet the ends. Right now
when you are earning and blessed to be alive and health ,
kindly concentrate on building your investment pool. When
at retirement consider the possible option whether you need
annuity or not.

I am sure if we plan your investment well , none of us will

feel necessity of having annuity plans.

Stick to basic investments

1. Fixed Deposit
2. Debt Mutual Fund
3. Equity Mutual Fund
4. Arbitrage Fund

There are 1 lakhs investment instrument and all of them are

based on
1. Equity
2. Debt
3. Commodities: Gold , silver etc
4. Real estate
Consider investing in the most pure form instead of being
trapped in complicated structured product. Simple Life,
Simple investment is all that we need

Jai Hind

With Love

DK 1

1 Dr Deepak Kaltari