Annuities Vs Life Insurance: Understandings The Basics

On one side life insurance cover provides policyholder the financial security for the dependents, while annuities ensure a solid and stable post-retirement income for the policyholder

The difference between annuities and life insurance is critical, and understanding them would shape the future.

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By Rakesh Goyal

In the bustling city of Mumbai, imagine a person who is approaching his 60th birthday. He has worked hard in his career to give everything to his family members. But now he is looking forward to a peaceful retirement. But with this new phase of life came a crucial question: how to ensure financial security in the golden years?

Now, he has two primary options before him — annuities and life insurance. The difference between these financial products is critical, and understanding them would shape the future. Here, we will demystify the basics of annuities and life insurance.

The Life Insurance Expedition

Life insurance is intended to offer monetary guard to the family members and the loved ones of the policyholders. It is a contract where the insurer pays a sum of money to the policyholder's beneficiaries upon the policyholder's death, providing financial support during difficult times. If the policyholder survives the policy term, they receive the sum assured as promised by the insurance company. There are various types of life insurance products available, allowing individuals to choose the one that best suits their needs.

Term insurance is the simplest and most affordable, providing high coverage at low premiums. However, it was a pure risk cover—if the policyholder survives the policy term, there would be no payout.

Whole-life insurance is for long-term security. These policies provided coverage for his entire life, coupled with a savings component. Such policies are slightly more expensive but ensure that the policyholder's family will receive a payout no matter when they pass away.

Endowment plans are a combination of insurance and savings. These plans would pay out the sum assured either on maturity or upon the death of the policyholder, whichever came first. Taking care of the family and building a corpus for future needs were the goals.

Unit-Linked Insurance Plans (ULIPs) offers additional flexibility and benefits. ULIPs combined life cover with investments in equity or debt markets, catering to his risk appetite and investment goals.

Money-back policies provide some payouts at frequent intervals during the policy term, along with a lump sum at maturity, ensuring liquidity at regular intervals.

Premiums paid for life insurance policies were deductible under Section 80C of the Income Tax Act, up to Rs1.5 lakh per year. Furthermore, under Section 10(10D), the maturity benefits are often tax-free. These tax incentives made life insurance an attractive option for safeguarding tge family’s future while also enjoying tax savings.

The Ride of Annuities

Let’s now turn our attention to annuities. Annuities are financial products designed to provide a stable stream of payouts, ideal for senior citizens who seek steadiness and certainty in their financial plan. The concept is simple yet profound. In annuities the policyholder would invest a lumpsum with the insurance company and they would start getting regular payment for their lives. This regular payment is called annuities. There were different types of annuities that one could look for.

Immediate Annuities would start paying the policyholder immediately after they have made their investment. This seemed ideal for someone who needed an instant income stream post-retirement.

Deferred annuities would begin payments after a certain period, allowing the invested amount to grow. This option required some waiting, but it could benefit retirees with other income in the early years.

A life annuity would ensure payments to the policyholder for his entire lifetime, providing him with a sense of security.

A joint life annuity is similar to a life annuity in that it would continue payments until both the policyholder and their spouse passed away.

One should be also mindful of the tax implications. In India, the annuity payments received were taxable, so one should consider this factor while planning their finances.

Conclusion

In the Indian context, both annuities and life insurance play pivotal roles in a well-rounded financial plan. On one side life insurance cover provides policyholder the financial security for the dependents, while annuities ensure a solid and stable post-retirement income for the policyholder. By striking a balance between the two, policyholders can enjoy their golden years with peace of mind, knowing they’ve made provisions for both themselves and their families.

The author is the director at Probusinsurance.com

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