Classification of Annuities

The annuities can be defined according to :

(i) commencement of income
(ii) number of lives covered
(iii) mode of payment of premium
(iv) disposition of proceeds
(v) special combination of annuities

Annuities According to Commencement of Income

1. Immediate Annuity

The immediate annuity commences immediately after the end of the first income period. For instance, if the annuity is to be paid annually, then the first instalment will be paid at the expiry of one year.

Similarly, in half-yearly annuity, the payment will begin at the end of six months. The annuity can be paid either yearly, half-yearly, quarterly or monthly.

The purchase of money (or consideration) is in single amount. Evidence of age is always asked for at the time of entry. The advantage of this is that with this help, it is possible to obtain a larger income than can be secured from the yield of investments.

The form of contract is of special interest to persons without dependents and it provides maximum possible consistent income.

2. Annuity Due

Under this annuity, the payment of instalment starts from the time of contract. The first payment is made as soon as the contract is finalized.

The premium is generally paid is single amount; but can be paid in instalments as is discussed in deferred annuity.

The difference between the annuity due and immediate annuity is that the payment for each period is paid in its beginning under the annuity due contract while at the end of the period in immediate annuity contract. The annuity due contract is beneficial for actuarial valuation.

3. Deferred Annuity

In this annuity contract, the payment of annuity, starts after a deferment period or at the attainment by the annuitant of a specified age.

The premium may be paid as a single premium or in instalments. Generally the deferred annuity is sold on level premium.

The payment of premium continues until the stated date for commencement of the instalments or until prior death of the annuitant.

At the death, the premium may be returned without interest. The deferred annuity can be surrendered for a cash amount (or cash option) at the end of or before the deferment period.

The surrender value is normally 950 per cent of the premiums paid excluding first premium before deferment period.

No surrender value is payable after the deferment period.

The deferred annuity can be issued to male or female lives. The female lives are generally able to avail lesser amount due to their higher longevity as compared to male lives after certain age.

The corporation does not require any medical examination but only proof of age is required. The corporation also issues this annuity provided the amount of annuity is not less than Rs.100 per annum or the instalment of annuity is not less than Rs.25 per month or the cash option is not less than Rs.1,000.

This annuity is useful to those who desire to provide a regular income for themselves and their dependents after the expiry of specified period.

Classification of Annuity According to the Number of Lives

1. Single Life Annuity

Under this annuity one single person following its contractor. This annuity is most beneficial to those who have no dependent and want to use all this saving during his life-time.

2. Multiple Life Annuity

In this annuity more than one life is contracted. The annuity is also of two types:

(a) Joint Life Annuity; where payment of annuity stops at the first death, and
(b) Last survivor annuity where payment continues up to the death of the last person of the group.

Classification of Annuities According to Mode of Premium

1. Level Premium Annuities

For availing the annuity, the annuitant can deposit some amounts periodically so that, at the end, he can get sufficient amount of annuity in equal instalments.

During the accumulation period, i.e., before commencement of the payment of annuity, he is given option to get the surrender value in cash or to get the paid up values reduced in proportion to the premium paid to the premium payable.

At the death of the depositor, the beneficiary can get the surrender values or premiums paid whichever is higher.

2. Single Premium Annuities

The annuity in this case is purchased by payment of a single premium. Generally, the life insurance amount is utilized for purchasing this annuity.

Classification of Annuities according to the Disposition of Proceeds

1. Life Annuity

This annuity offers a regular income to the annuitant throughout his life-time.

No payment is made after his death. This is beneficial not in every case. When the annuitant dies before receiving all the amounts of the purchase price he is at a loss.

But, if survives for a longer period than expected, he is benefited from this annuity.

When we talk of annuity we mean such types of annuity. In other words, annuity means annual payment up to life. But this annuity will be treated as fair-weather friend and the dependents may be at loss because the father who had accumulated a large amount could not use the funds at early death.

2. Guaranteed Minimum Annuity

Annuity payment up to a period is guaranteed by the insurer. If the annuitant dies before the specified period, annuity will continue up to the unexpired period.

This annuity may be of two types :

(i) Immediate Annuity with guaranteed payment, and
(ii) Deferred annuity with guaranteed payment.

(i) Immediate Annuity with Guaranteed Payment

To safeguard the loss in case of early death of the annuitant, this annuity is issued where payment for a fixed number of years will continue, irrespective of death.

Sometimes, instead of continuing the annuity payments after the death of the policy-holder, the difference of the purchase money and annuity instalments already paid is returned as a lump sum to the legal representative of the annuitant.

This annuity may be of two types: first, where the payment is continued up to the fixed period and second, where payment continues up to the fixed period and up to life thereafter.

The corporation issues the second type of annuity where payments are guaranteed for 5, 10, 15, or 20 years and hereafter up to life.

It means that payment certainly be made up to this period whether the annuitant is alive or dead within this period and if the annuitant survives after period, he is paid the annuity up to this survival.

(ii) Deferred Annuity with Guaranteed Payment

During the deferment period, there is no difference between this annuity and ordinary deferred annuity. After deferment period, the payment under this policy will continue for a fixed period, say, 5, 10, 15 or 20 years and up to life, thereafter.

This policy also guarantees refund of cash value of the balance of annuity where the insurer promises to pay a lump sum to the beneficiary or to the annuitant’s estate, the difference, if any, between the total of annuities received before the annuitant’s death and the purchase price.

3. Temporary Life Annuity

Under this plan, annuity payment ceases at the end of a specified period or at the death whichever is earlier. The corporation does not issue such annuity.

4. Retirement Annuity Policy

This annuity is useful to employees at the time of retirement. This annuity is issued under the following conditions:

(i) The main object of the annuity contract must be of the provision of life annuity to the individual in old age;

(ii) During the life of the individual no sum other than the annuity to the individual shall be payable under the contract;

(iii) All annuities must be payable in India only;

(iv) The annuity must commence between the ages of 58 and 68;

(v) The annuity payable shall not be capable of surrender, commutation or assignment;

(vi) The annuity will ordinarily be payable for the life of the annuitant but if so desired provision can be made for annuity to continue for a specified period notwithstanding the death of the annuitant within the term on condition that such period of guarantee for payment of the annuity does not exceed ten years.

This Annuity Policy will not be issued for an annuity of less than Rs. 600 per annum or where the annuity instalments are payable for a monthly instalment of less than Rs.50.