Variable Annuity Products Set to Hit the Indian Market this Year

Annuity plans are a kind of financial product that provides guaranteed regular payments to policyholders for the rest of their lives or a certain period as decided by the policyholders in return for making a lump sum or staggered payment over a period of time. The annuity market is picking up pace in India and currently stands at USD 5 billion, compared to the mammoth USD 170 billion in the U.S.A.

India is one of the countries where annuity plans are still underdeveloped due to a lack of incentives and low insurance penetration. To tackle this issue, the Insurance Regulatory and  Authority of India has developed Variable annuity plans that are a bit different from traditional annuity plans.

Variable Annuity Plans- How do They Work?

As the name suggests, variable annuity plans aim to provide policyholders with a variable annuity instead of a fixed annuity income. An annuity plan is like an investment vehicle where a policyholder can park their investment, which the insurance companies then use to provide regular income over time.

In variable annuity plans designed by IRDA, a fixed minimum guaranteed amount is offered to the policyholder. These plans are offered in individual and group forms.

Return of purchase price- the amount returned to your nominee after your demise is guaranteed up to a specified percentage, typically 60%. For example, if you are purchasing a variable annuity plan for Rs. 10 Lakhs, then at least Rs. 6 lakhs of it would be paid as the return of purchase price in case of your demise, and the rest of the amount would be invested, to generate higher returns. This guaranteed portion of 60% would be invested in fixed-income securities to generate the fixed income for the policyholder.

The remaining 20-40% could be decided by the policyholders to invest in equity markets, thereby linking the performance of this investment to equity market performance. The higher the equity market performance, the higher the returns, and vice versa.

Variable annuity plans would start by linking them to equity-linked returns and then expand to other investment options at a later stage. One can think of it as a Unit-Linked Insurance Plan, where the policyholder would invest 20-30% of the annuity to purchase units whose performance would be linked to the equity markets.

The major benefit of variable annuity plans is that policyholders have the option to invest their life savings/ retirement funds in both equity markets and fixed-income generation markets, thereby allowing them to beat inflation. This way, they could benefit from the market’s upsides while at the same time getting regular income.

Regular Annuity Plans- Working Model

Currently, regular annuity plans are available in India, where policyholders may choose to make immediate or deferred payments after purchasing an annuity plan. Immediate annuities provide payments immediately after the purchase, whereas deferred annuities provide payouts after a certain period of time, which is known as the accumulation period.

In the case of regular annuity plans, the payout is pre-decided based on the investment made by the policyholders. For example, assume Mr. Rao, a 50-year-old Marketing professional, purchases an annuity plan for Rs. 15 Lakhs. He plans to retire after 10 years at the age of 60 and wants an income after retirement. He went for a deferred annuity in which the claim payout would happen after the accumulation period of 10 years. Post-retirement, Mr. Rao would get approximately Rs. 1.62 lakhs yearly for the rest of his life.

Advantages of Variable Annuity Plans

• Growth Potential: Compared to a regular plan, the most important differentiator in a variable annuity plan is its ability to grow the corpus at a higher rate. Variable annuity plans can invest a part of the purchase price in equity-linked markets and thereby benefit from the higher returns generated from these markets. Any market upside would be passed onto the customer while protecting a part of the amount invested. This means that even if equity markets crash, a part of your investment will remain intact as you will not absorb the entire crash risk.
• Ability to Beat Inflation: Regular annuity plans are designed to provide a regular amount throughout your lifetime. This amount is constant and is not adjusted according to the country’s inflation, which may not be sufficient for maintaining your desired lifestyle. However, this problem could be solved with the introduction of variable annuity plans. A part of the purchase price is invested in equity markets, which would generate higher returns than fixed-income markets, allowing the policyholder to beat inflation.
• Standard Death Benefit: As mentioned above, variable annuity plans guarantee around 60% of the return on purchase price. While the remaining 40% is invested in equity markets, 60% is invested in fixed-income-generating markets. The death benefit would be available to policyholders similarly to that of a regular annuity plan.
• Lifetime Retirement Income: Variable annuity plans provide policyholders with lifetime retirement income. If the markets perform above expectations, they can help you beat inflation and generate higher returns than fixed-income securities. As in regular annuity plans, variable ones have immediate and deferred payout options.

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