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We spend about 30 years plus of our life working to make a living. With increase in life spans, planning for retirement has become even more important. Most of us will enjoy two decades plus of retired life. Thus, retirement planning is essential for everyone irrespective of their income or lifestyle.

Annuity plans are an important part of retirement planning. In simple words, an annuity plan provides a regular and guaranteed income, or ‘salary’ in the retirement years. Annuity is treated as income for tax purposes and is taxed as such. The annuity paid is dependent on the lump sum investment that you make to the insurance company when buying the plan. Insurers invest this money into various financial instruments and the returns generated are used to pay the annuity. An annuity is usually purchased by people above the age of 55.

Here are a few key factors that you should consider when purchasing one.

Identify the amount you want every month

The first step is to identify how much lump sum investment you can make or how much pay-out you need. An easy-to-use calculator on insurers’ website will allow you to determine the lump sum amount based on the pay-out you wish to receive, or vice versa. Insurers also allow you to choose the periodicity – ranging from monthly, quarterly, half-yearly to yearly.

Choose the right category

There are primarily two types of annuity products. One is the ‘Immediate Annuity Plan’, wherein the pay-outs begin as soon as the lump sum amount is invested. This is suitable for a person buying the plan very close to retirement. The second is ‘Deferred Annuity’, wherein the pay-outs begin after a certain date. This option is suitable for a person who is buying a policy before retirement age and would need the pay-out only after a few years.

Find the right plan

You need to choose between Policy with Return of Purchase Price (ROP) or Policy Without ROP. For the former, the principal amount invested is returned to the legal heirs on death of the policyholder. This allows you to leave a lump sum amount for your nominee on your demise. For policy without ROP, the principal amount invested is not passed on to legal heirs, but the annuity amount paid each month is much higher as compared to first option. This is a good option to pass on the risk of living too long to the insurer. For an investment of ₹10 lakh today, a 60-year-old person in policy with ROP will get around ₹4,500 per month. For the same investment in a policy without ROP, he / she will get around ₹6,000 per month.

Expand coverage to include life of spouse

One also needs to choose prudently on whether the annuity is for a single life or joint life. In a case of single life policy, the annuity is paid till the death of the policyholder. But in case of a joint life policy, the annuity is paid till the death of last survivor among self and spouse. The annuity payout for joint life is lower than for single life. Hence you need to weigh your option judiciously.

To sum up, annuity provides steady income throughout your life. In the end, choose a plan that will help you play your second innings even better than the first.

The writer is President-Business Strategy, SBI Life Insurance