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Annuity Life Insurance Plans: A Comprehensive Guide

TeamAckoApr 19, 2024

Combine insurance with investment products, and there you go - you've got annuities! Annuity plans have become popular lately for Indians who want to boost their savings. Retirement planning is crucial to ensure a comfortable and financially secure future. Annuity Plans are one such investment option that provides a guaranteed income for life.






Guaranteed income:  Annuities provide a guaranteed stream of income for life or a set period

Low rate of return on investment: Annuities often provide lower returns compared to other investment options

Financial protection against inflation:  Some annuities offer cost of living adjustments to keep pace with inflation

Not flexible:  Once an annuity is purchased, the terms cannot be easily changed or cancelled

Principal protection:  Fixed annuities safeguard your initial investment from market volatility

High cost:  Annuities typically have higher fees and expenses compared to other investment products

Death benefit:  The nominee receives the remaining annuity payments or the sum assured, depending on the type of plan chosen

Hassle-free investment:  Annuities are managed by the insurer, requiring minimal involvement from the investor

Tax saving:  Under Section 80CCC of the Income Tax Act, annuity contributions are eligible for tax deductions.

What is a Life Annuity?

A life annuity typically refers to a financial product where the annuitant (the owner) receives fixed monthly, quarterly, half-yearly or annual payments until death. It is designed to provide guaranteed or retirement income replacement and is offered by insurance companies. 

So, what's an annuity? A contract between you and a life insurance company provides several benefits. One of the key benefits is that it allows you to build up money over time and convert your savings into guaranteed future income payments. Unlike stocks or bonds, which fluctuate in value, an annuity provides stable income even if your account value drops.. 

What is an Annuity Plan in Life Insurance?

An annuity is not life insurance; it helps you accumulate money for future income needs. On the other hand, life insurance provides benefits to your nominees if you pass away. This means an annuity plan in life insurance combines the pros from both worlds - upside growth potential, guaranteed income later, and continued life insurance coverage.

So, how are premiums paid? Under an annuity plan, the policyholder makes a one-time payment or several payments over a period of time. The insurance company, in return, promises to provide regular payments to the policyholder, typically for the rest of their life. This regular payment is called an annuity.

  • You pay premiums during an early "savings phase", accumulating money in your account. These premiums plus interest earnings fund the eventual income payments and death benefit.

  • If you die young, your beneficiaries get a lump sum. But if you enter the "payout phase," your account morphs into scheduled income payments, like an allowance stretching for years or even your whole life!

Let's understand annuity life insurance with an example: 

Rahul, a 45-year-old businessman, purchases an annuity life insurance policy with a ₹50 lakh death benefit. He agrees to pay ₹1 lakh annually for 20 years until he turns 65.

During this 20-year "savings phase," Rahul's premiums accumulate in his account, growing tax-deferred with compound interest. The insurance company invests these funds conservatively to ensure future obligations. 

Two scenarios can unfold:

  1. If Rahul unfortunately passes away at age 55 during the savings phase, his beneficiaries (like his wife and children) would receive the guaranteed ₹50 lakh death benefit. This payout helps secure his family's financial future in his absence.

  2. However, if Rahul lives to age 65, he will stop paying premiums and start receiving guaranteed income payments for life. These payments are funded by his accumulated premiums plus investment earnings. Based on his account value and age, he receives ₹40,000 per month, providing a reliable income stream in retirement.

How Do Annuity Plans Work in India?

Annuity Plans work by investing a lump sum of money in an insurance company or financial institution, which then pays out regular payments to you. There are two main phases - the accumulation and payout phases. 

Accumulation Phase: 

During the accumulation phase, the policyholder makes either one lump sum payment or regular ongoing payments into the annuity fund. The insurance company invests the payments made during this phase into conservative investments like bonds. 

The money grows tax-deferred with compound interest. At this time, there is also a death benefit component in place. If the insured dies during the accumulation years, the death benefit will be paid to the listed beneficiaries. The death benefit amount depends on the type of annuity life insurance and options selected but is usually greater than the annuity account value or a guaranteed minimum.

If the insured reaches the end of the accumulation phase and is still living, they will begin receiving regular income payments from the insurance company. While alive, the policyholder cannot access the funds in the annuity - it must be taken as an income stream. 

Payout Phase: 

There are a few options for payouts, including payments for a set number of years or guaranteed lifetime income no matter how long they live. 

  • Lifetime income can provide protection against the risk of outliving savings during retirement years. 

  • The insurance company invests the accumulated premiums and interest earnings in generally safe instruments to fund these future guaranteed obligations.

Annuity life insurance is a hybrid between pure life insurance and annuity products. Traditional term life insurance pays if the insured dies during the term length, while an annuity only offers income during retirement years if you live longer. Annuity life insurance combines benefits using the same pool of money funded by premiums plus interest earnings on those contributions.

5 Types of Annuity Plans

Different types of Annuity Plans are available in India that cater to the diverse needs of individuals. Here are some of the common types of Annuity Plans in India.

  1. Immediate Annuity Plan

  2. Deferred Annuity Plan

  3. Fixed Annuity Plan

  4. Variable Annuity Plan

  5. Lumpsum Annuity

Immediate Annuity Plan

As the name suggests, an immediate annuity plan starts paying guaranteed income as a regular pension right after the purchase. There is no accumulation or deferral phase. 

  • You make a lump sum payment upfront and then receive level pension payments for life or a set period.

  • Provides retirement income security immediately.

  • Since there's no investment risk or growth in the principal amount, the income payments remain fixed throughout based on the initial purchase price.

Deferred Annuity Plan

Unlike an immediate annuity plan, a deferred annuity is an insurance contract that allows you to accumulate money on a tax-deferred basis during an initial accumulation phase and then receive payouts at some point in the future during the payout phase, typically during retirement. The deferred taxes and interest earnings allow the funds to grow more quickly.

Fixed Annuity Plan

In a fixed annuity plan, the insurer declares a guaranteed interest rate for income payments at the time of purchase. This interest rate remains unchanged and is applied during the payout phase to determine the quantum of the monthly pension. 

The money used to generate income is invested in fixed-return instruments like government securities, corporate bonds, etc. So, you receive a predefined rate of return. Investors can choose the duration of the annuity payments, which can be for a fixed number of years or until the investor's death.

Variable Annuity Plan 

Unlike a fixed annuity, a variable annuity invests the accumulated premiums in equity markets via funds. So, the future income payments vary based on the performance of the underlying investments. In markets experiencing growth with strong returns, pension payments can rise substantially. However, the income can also decrease if the equity investments underperform. The policyholder bears the income fluctuation risk in exchange for potentially higher returns.

Lumpsum Annuity

Most annuity plans take the benefit as a guaranteed monthly pension only. But insurers nowadays also offer an option to cash out the entire benefit as a tax-free lump sum when it becomes available. To exercise this, you must indicate this preference at the time of purchase itself, as terms vary across insurers. The lump sum factor rates applied determine how much of the annuitised value you receive as a one-time payment. 

Life Annuity vs ACKO Life Flexi Term Plan

Basis of Comparison

Life Annuity 

ACKO Life Flexi Term Plan


Provide guaranteed income for retirement to supplement pension and other savings

Offer pure life insurance protection with flexible death benefit payout

Premium Payment

Regular ongoing contributions or lumpsum amount. 

Flexible premium payment terms

Accumulation Phase

Money grows tax-deferred with compound interest to build a large corpus

No accumulation phase or cash value component

Death Benefit 

May offer death benefit depending on the type of plan chosen 

Death benefit paid if the insured dies during the coverage term

Payout Structure

Lifetime guaranteed income as monthly pensions OR for a fixed period

Lump sum payout to beneficiaries with the flexibility to choose monthly payments or a one-time full payment 

Income Continuity

Lifelong monthly income protects against outliving retirement savings

No income continuity; one-time death benefit payment


Limited flexibility or control once payments start

Highly flexible with options to modify coverage, payout, and riders as needed

Rate of Return

Predefined interest rates on income in fixed annuities. Market-linked returns in variable products.

No returns or interest earnings; pure life insurance product

Tax Benefits

Premiums are eligible for tax deductions under section 80CCC of the Income Tax Act. Accumulation interest and income are taxable.

Premiums eligible for tax deduction under Section 80C; tax-free death benefit

Investment Risk

Very low in fixed annuities where income is guaranteed. Moderate market risk in variable products.

No investment risk; the policy pays death benefit on valid claims

ACKO Life Flexi Term Plan

ACKO Life Flexi Term Plan offers insurance solutions that distinguish itself through its unmatched flexibility and adaptability to life's evolving needs. The plan offers several key benefits: 

Adaptable Sum Assured

Flexible Policy Tenure

Flexible Payout Options 

Will Creation Service

Affordable Premiums

Easy Claim Process

ACKO’s digital-first approach simplifies the claim process, allowing your beneficiaries to initiate claims online with minimal paperwork and reducing the burden during challenging times. With a proven history of prompt claim settlements, you can have confidence that your loved ones will receive the financial help they need quickly, providing them with peace of mind and support when needed. 

Determine Which Plans Work For You

Choosing the right life insurance policy can be daunting, especially when you have multiple options. These policies offer unique benefits and cater to different individuals' financial needs and goals. To help you make an informed decision, evaluating your specific situation and requirements is essential.


Recommended Policy

Seeking guaranteed retirement income

Life Annuity 

Need pure life insurance protection

ACKO Life Flexi Term Plan

Have maxed out other retirement savings options

Life Annuity

Budget-conscious and prefer lower premiums

ACKO Life Flexi Term Plan

Desire flexibility to adjust coverage as needed

ACKO Life Flexi Term Plan

Comfortable with an illiquid, long-term commitment

Life Annuity 

Uncertain about future financial needs

ACKO Life Flexi Term Plan

Prioritise leaving a legacy or inheritance

ACKO Life Flexi Term Plan

Expect to live a long life in retirement

Life Annuity 

Prefer a fully digital, hassle-free experience

ACKO Life Flexi Term Plan

Seek tax-deferred growth on investments

Life Annuity 

Need the ability to change beneficiaries easily

ACKO Life Flexi Term Plan

For many, though, the low-cost ACKO Life Flexi Term Plan may be the most suitable. It offers extensive coverage at affordable premiums to protect your loved ones. If you simply want death benefit protection and have other sufficient retirement income sources like pensions already in place, the ACKO Life Flexi Term Plan may be the better match.

Additional Riders Available

Insurance carriers offer a variety of supplementary riders for buyers to enhance their protections:

  • Cost of living adjustment: Increases payouts to match inflation over time

  • Death benefit enhancement: Grows the death payout amount over the course of the accumulation phase. Check out ACKO Life Accidental Death Benefit Rider.

  • Guaranteed minimum withdrawal benefit: Assures annual withdrawal eligibility leading up to annuitization

Choosing the Right Annuity Plans in India

As the Indian insurance market continues evolving, a variety of annuity plans exist to meet differing financial needs and risk appetites. So, here are some factors to consider: 

  • Financial Position and Life Stage: Assess your net worth, existing retirement savings, outstanding debt, income continuity needs and standard of living expectations in retirement. This shapes how much annuity income to target and whether diversifying through multiple insurers is prudent.

  • Annuity Payout Start Age: Evaluate if immediate payments or deferring income start better aligns with your retirement plan timeline. 

  • Insured Lifespan: Estimated longevity shapes the duration of needed coverage. Opt for lifelong guaranteed payments instead of fixed 10- or 15-year payout terms if you expect to live longer into ripe old age. Joint-life annuities covering spouses provide income security, too.

  • Payout Flexibility: Assess if fixed same-amount instalments or increasing variable payments based on investment returns align better to combat inflation over decades spent in retirement.

  • Riders and Features: Check out riders around death benefits, Waiver of Premium Disability Rider, annuity modification or commutation, and customise according to your situation.

  • Insurer Credibility: Consider only insurers with established performance track records for regular pension payouts and claim settlements. 

Annuity Plans vs Other Retirement Planning Options in India

When it comes to retirement planning in India, several options are available, including annuity plans, pension plans, and mutual funds. Here's a comparison between Annuity Plans and other popular retirement planning options in India.

  • Annuity Plans

Annuity Plans are designed for retirement planning and offer a guaranteed income stream for the rest of your life. They provide a fixed payout at regular intervals, and you can choose the payout frequency and duration that suits your needs. Annuity Plans also offer tax benefits under Section 80CCC of the Income Tax Act, which allows you to claim a deduction on the premium paid.

  • Pension Plans

Insurance companies offer pension plans and provide a regular income stream during retirement. They offer a lump sum payout on maturity or a regular payout after retirement. Pension plans also offer tax benefits under Section 80C of the Income Tax Act, which allows you to claim a deduction on the premium paid.

  • Mutual Funds

Mutual funds offer the potential for higher returns but come with higher risks. They invest in a range of assets like stocks, bonds, and other securities, and the returns are based on the performance of these assets. Mutual funds offer tax benefits under Section 80C of the Income Tax Act, which allows you to claim a deduction on the investment made in certain types of mutual funds.

Annuity Plans are ideal for those seeking a guaranteed income stream during retirement, while pension plans and mutual funds are suitable for those seeking higher returns with higher risks. Ultimately, retirement planning depends on your needs and financial goals.

Factors Affecting Life Annuity Rates

Several factors can influence your life annuity rates. Some of the key factors include:

Age Older age gets higher rates due to increased mortality risk

Gender Rates differ due to variations in life expectancy

Investment Amount Higher investment amounts may lead to higher annuity rates 

Duration of the policy Longer policy durations may result in lower annuity rates 

Eligibility Criteria for Annuity Plans in India

Annuity Plans are a popular retirement savings option in India that provides a steady stream of income after retirement. Here are the common eligibility criteria for Annuity Plans in India.

  1. Age: The minimum age for investing in an annuity plan is 30 years, while the maximum is 85 years. The age limit may vary depending on the type of annuity plan chosen.

  2. Source of Income: Individuals investing in Annuity Plans must have a regular source of income, such as salary, pension, or business income.

  3. KYC: Individuals must complete the KYC (Know Your Customer) process to invest in an annuity plan. This involves providing identity and address proofs and other relevant documents.

  4. Health status: Some Annuity Plans may require individuals to undergo a medical examination to determine their health status. This is usually required for plans that offer higher payouts or longer payment durations.

  5. Nationality: Indian citizens and non-resident Indians (NRIs) are eligible to invest in annuity plans.  However, NRIs' rules and regulations may vary depending on their country of residence.

It's important to note that the eligibility criteria may vary depending on the type of annuity plan chosen. It's recommended to check with the insurance company or financial institution offering the plan for more information on the eligibility criteria and documentation required.

Wrapping it up

Annuity life insurance offers a means to fund reliable lifetime income in retirement. It safeguards against longevity risk while accelerating payouts if diagnosed with a terminal illness. 

Though complex, annuities provide income stability once payments start. Evaluate if benefits match your situation more closely than low-cost term insurance since access to funds if received by beneficiaries differs. Use this overview as a starting point when considering supplementing your retirement strategy.

Frequently Asked Questions 

Below are some of the frequently asked questions on Annuity Life Insurance Plans


What is an annuity plan in life insurance?

Under an annuity plan, the policyholder makes a one-time payment or several payments over a period of time. The insurance company, in return, promises to provide regular payments to the policyholder for the rest of their life or a specific period. This regular payment is called an annuity.

What happens if you surrender the annuity or life insurance plan?

Yes, one can surrender an Annuity Life Insurance Plan in India. However, the surrender value may be lower than the premium paid, and surrender charges may apply. It is essential to read the policy terms and conditions carefully before surrendering the plan.

Can you lose money in an annuity life insurance plan?

During the accumulation phase, it's unlikely to lose initial principal given conservative fixed investments in bonds, money markets, etc. Losses are possible in variable annuities invested in mutual funds, but income payments after annuitisation cannot decrease (just not increase).

What charges or fees apply to these annuity plans?

Common annuity fees include annual maintenance charges, management fees, surrender penalties if not held to term, and embedded commissions paid to agents. Certain riders also cost extra. Compare fee structures carefully across plans.

Who should consider purchasing Annuity Life Insurance Plans in India?

Annuity Life Insurance Plans are ideal for individuals who want to secure their retirement income or provide a steady income to their family members in case of their untimely demise. These plans are also suitable for individuals who want to receive a regular income stream while avoiding market risks.

How can one purchase Annuity Life Insurance Plans in India?

Annuity Life Insurance Plans can be purchased from insurance companies and financial institutions. The policyholder can choose the plan type and premium payment option based on their financial goals and needs.

What are the tax benefits of Annuity Life Insurance Plans in India?

Annuity Life Insurance Plans offer tax benefits, such as deductions on premium payments under Section 80CCC of the Income Tax Act, 1961 (old regime). The income received from the annuity plan is also tax-free under Section 10(10D) of the same Act.

Can one surrender Annuity Life Insurance Plans in India?

Yes, one can surrender Annuity Life Insurance Plans in India. However, the surrender value may be lower than the premium paid, and surrender charges may apply. It is essential to read the policy terms and conditions carefully before surrendering the plan.

Can one add riders or additional benefits to Annuity Life Insurance Plans in India?

Some insurance companies in India offer riders or additional benefits, such as Accidental Death Benefit, Critical Illness Cover, and Waiver of Premium, to enhance the coverage of Annuity Life Insurance Plans. However, these riders may come with an additional premium cost.

What happens to the Annuity Life Insurance Plans after the policyholder's demise?

The policyholder can choose a nominee who can receive the annuity income after the policyholder’s demise. Some insurance companies also offer a return of purchase price option, where the nominee can receive the purchase price or surrender value of the plan after the policyholder's demise.

Can one change the annuity income payout frequency after purchasing the Annuity Life Insurance Plan?

Some Annuity Life Insurance Plans in India allow policyholders to change the annuity income payout frequency, such as monthly, quarterly, half-yearly, or annually, after a certain period. However, the insurance company may charge a fee for changing the frequency.

What is the difference between Annuity Life Insurance Plans and traditional life insurance plans in India?

Annuity Life Insurance Plans provide a regular income stream to the policyholder, while traditional life insurance plans offer a lump sum payment or a combination of lump sum and regular income payment. 

Annuity Life Insurance Plans are suitable for individuals who want to secure their retirement income or provide a steady income to their family members, while traditional life insurance plans are ideal for individuals who want to provide financial protection to their family members in case of their untimely demise.


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