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Difference between Life Insurance & Annuity

dateKnowledge Centre Team dateAugust 13, 2021 views234 Views
Life Insurance Plan | Annuity Plan | Best Life Insurance Plans

You plan and work towards giving a beautiful future to your loved ones. If an unfortunate event happens, what happens to their future? Secondly, you may plan your finances till 80 years of life, but what if you live for 100 years? You would not like to work in your 80s, so you must be prepared.

When you plan for your future and do financial planning, you have to prepare for two scenarios:

  • What if you die soon?
  • What if you live too long?

Life Insurance vs Annuity

The similarities between the plans or, the shared characteristics may lead you to use the terms alternatively. However, you need to understand the significant differences between the two. So, when you plan your financial journey, you know what exactly you want. Let us look at some differences between life insurance and annuity plans:

Life Insurance Plans Annuity Plans
Used for protection of dependents and meet a future financial goal Used for income protection for self and spouse
Life cover cannot be deferred An annuity can be deferred for a few years after the investment
The protection feature only works after your untimely demise Annuity plans work only until you or your spouse is alive
Life insurance plans generally do not lead to an annuity Annuity plans may carry a small life cover as well
Partial or maturity pay-out from life insurance plan can be fully tax-exempt Annuity pay-outs are taxable as salary in the year they are received
Only whole life insurance plan or whole life term plan work as a legacy plan Almost all annuity plans can work as a legacy plan if there is an unutilised amount

Life Insurance & Annuities

To deal with both these scenarios, you need to have two different plans - Life insurance and annuities. Both of these are long-term financial plans, but there are differences. Life insurance provides economic protection to your family if you die, while annuity guards against outliving your assets.

The similarities between both the plans are as follows:

1. Long-term investment and protection plans

2. Can offer inflation and tax-protected growth

3. Safest long-term investments

4. Life insurance plans can lead to an annuity

5. Annuity plans often carry a life insurance cover

Annuity is for Self

When you buy an annuity plan, you invest for your income security, especially for a time when you will not have an active source of income like employment. On the other hand, when you buy a life insurance plan, you invest in a better future for your loved ones.

The best annuity plans are those which can secure your life after retirement. For example, the Pension4Life plan from Canara HSBC Oriental Bank of Commerce Life Insurance offers a guaranteed income till your natural demise. In the case of a joint life plan, the annuity will continue until either one of you are alive.

Thus, annuity ensures financial safety for you. However, the purpose of a life insurance plan is to ensure the financial safety of your dependents if anything happens to you.

Thus, annuity ensures financial safety for you. However, the purpose of a life insurance plan is to ensure the financial safety of your dependents if anything happens to you.

a. Build an adequate corpus for your child’s education and marriage goals

b. Ensure that the child will have the planned financial support even in the case of your early demise

Thus, life insurance is the best investment to protect your dependent’s goals and life financially.

Annuity can be Deferred

The other difference between life insurance and an annuity plan lies in the time you receive the plan benefit. The life insurance benefit is very straightforward and available immediately.

For instance, a life insurance benefit ensures that in the case of your death, your beneficiary receives the lump sum amount (or regular payment starts). This benefit is available from the moment your premium is accepted by the life insurer.

However, with annuity plans, you can choose to receive monthly or quarterly regular payments immediately, or a few years later. It means you can invest in an annuity plan now and postpone the regular payments to start a few years later.

For example, assuming you have a retirement corpus of Rs. 50 lakhs ready at the age of 55, but you will need a regular income only after the age of 60. You can invest the amount in the Pension4Life plan and select the option for a regular income to start once you turn 60, that is, five years later.

Also, if your annuity plan also carries a life cover, the cover will be available immediately after purchase.

Annuity Works During Life

The life insurance plans come to benefit you in the unfortunate event of your death, injury or illness. On the other hand, an annuity plan works while you are alive.

When you invest in an annuity plan you can choose to continue the annuity for a limited time or until your natural demise. Either way, the annuity plans only continue so far you (or your spouse in case of a joint life annuity) are alive.

While the life insurance plans like term insurance will only work after your demise.

Life Cover As A Part of Annuity Plan

An annuity is not just about regular income post-retirement. If you want to get the benefits of life insurance in the same plan, you have an option to do it. Life cover ensures that your spouse or your nominee can enjoy the same financial security you provided even after you.

Almost all the annuity plans provided by life insurers offer life cover options. Few others like Pension4Life from Canara HSBC Oriental Bank of Commerce Life Insurance also provide accidental and critical illness cover options.

Annuity Pay-out is Taxable

The annuity pay-out you receive is taxable as salary income in the financial year you receive it. Thus, if you receive more than Rs. 2.5 lakhs (Rs 3 lakhs in case of the old regime) in a financial year after the age of 60 the excess amount will be taxable.

However, any amount you receive from a life insurance policy, be it on maturity or before, after the lock-in period is exempt from tax except when:

a. Your annual investment in the plan exceeded 10% of the base life cover of the plan

b. You invested more than Rs 2.5 lakhs in a year in ULIP plans (bought after 1st Feb 2021)

Annuity Works as a Legacy

When you invest in a lifetime annuity plan, you also invest in a legacy plan. Lifelong annuity including Pension4Life plan guarantees annuity payments until your ultimate demise. After your demise, the remaining amount is made available as a lump sum payment to your nominees.

In the case of joint life policies, the pension may continue until the death of your surviving spouse. However, even in this case, the annuity plan will return the remaining amount to your nominees.

Thus, it is pretty clear there is a significant difference between life insurance and annuity plans. While planning your financial journey, you should mix the two to maximize the benefit and safety for your family and yourself. Canara HSBC Oriental Bank of Commerce Life Insurance annuity plans come with benefits to ensure that you can meet your final few financial goals with confidence.

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Frequently Asked Questions (FAQs) for Retirement and Pension Plans

The premium is one of the most important factors to consider before buying a policy. Many people buy a life insurance policy with a high sum assured but are unable to process the premiums for the entire premium payment tenure. You can get a better idea of the premium outgo with the Premium calculator available in the ‘Tools and Calculator’ section of

The Invest 4G plan offers three benefit options to choose from. If you have opted for the Life Option or Whole Life Option, the insurer will pay the nominee(s) death benefit if the policyholder meets with an unfortunate incident. However, in the Life Option with Premium Funding, the policy continues even after the death of the policyholder. The company pays the remaining premiums until the policy matures.

Life is unpredictable and so it is important to prepare for all eventualities. If you regularly save a substantial amount of your income for retirement, the corpus may expand to a comfortable level before retirement. In case you become disabled and are unable to contribute to the retirement plans, most plans will continue to multiply your savings. The amount already accumulated will continue to grow and besides the existing plans you can also choose to invest in pension schemes specifically designed for people with disability.

Investment in ULIPs like Invest 4G plan qualifies for tax deductions under section 80C of the income tax law. The maturity benefits of ULIPs are also tax-exempt under section 10 (10D) of the Income Tax Act, 1961. However, if the premium paid during the policy term is more than 10% of the sum assured, the maturity proceeds will be taxable.

The concept of early retirement is catching up fast in India, but there are no specified ages for early retirement. While in some western countries the age between 35 and 45 is considered favourable for early retirement, in India the ideal age is 45-50 years. With the right planning and investments, it is not very difficult to retire early.

At the age of 35-40, people generally have several responsibilities such as children’s education and various EMIs. It is difficult to spare a substantial amount of income for retirement. Depending upon the needs of the household and the lifestyle, one should aim to save around 40-50% of his/her income. Around 10% of the income should exclusively be allocated for retirement planning. Here are some tips to choose the best retirement plan.

  • Focus on your needs: It is easier to formulate a strategy when the goal is clear. Make an estimate of the amount required to sustain your life. Take inflation into account and zero in on the targeted corpus.
  • Research thoroughly: Conduct thorough research before investing in any financial product. Read the term and conditions properly and try to understand how an investment product fits your needs.
  • Consider different products: The market is awash with all kinds of investment products. Do not follow conventional advice as the need of every person is different. Take into consideration all the suitable products, conduct an objective analysis and then invest.

Owning a house is a cherished dream for many. There are several ways to save for a new house, but in urgent cases, people may be tempted to withdraw from their retirement fund. There are various financial products for retirement planning, and all have different withdrawal rules. In the case of the National Pension Scheme, partial withdrawals for special purposes like buying a house are allowed only thrice during the policy tenure. However, to avail the withdrawal facility, you should be an NPS investor for at least 10 years and you are permitted to withdraw only 25% of your contribution. If you have a PPF account, you can withdraw 50% of the accumulated amount, but only after staying invested for at least 6 years. The Invest 4G plan also allows partial withdrawals after five years of investment.

The quantum of monthly savings depends on the specific needs of the buyer. Financial advisors, however, suggest people save around 15% of the monthly income for retirement.

Retirement plans such as NPS have a very low entry threshold. It is also open to all and anyone can open an NPS account and start saving. A small business can also invest in Invest 4G plan from Canara HSBC Oriental Bank of Commerce for as low as Rs 5000 every month.

The choice between paying off a student loan or start a retirement account is not a difficult one. Starting early for retirement planning has its own advantages but extending the student loan will increase the interest burden. You will have to find a balance between the two. Try to pay off the student loan as soon as possible, but do not hold back on investing in a retirement account.

Most people nominate their spouse to receive retirement benefits in their absence. But a spouse is not automatically entitled to be the beneficiary of a retirement account owned by the other spouse.

Gold is a safe investment asset and investors often flock to the yellow metal to stabilise their portfolios. Holding a small quantity of gold can be considered as the intrinsic value of gold remains intact. You can also choose to have an exposure to gold through ULIPs. ULIP funds invest in a variety of asset classes and some fund options also have a small exposure to gold. You can choose fund options with gold to have a small and indirect investment in gold.

While there are no explicit rules barring the use of retirement account to finance real estate, it may not be advisable to do so. For instance, you are allowed to avail loan from the PPF account from the third financial year. The loan can be used to finance real estate, but it would defeat the purpose of having a dedicated retirement account.

While there are no explicit rules barring the use of retirement account to finance real estate, it may not be advisable to do so. For instance, you are allowed to avail loan from the PPF account from the third financial year. The loan can be used to finance real estate, but it would defeat the purpose of having a dedicated retirement account.

The government has allowed all central government pensioners to open a joint account with their spouses.

Vesting date or age signifies when your pension plan’s accumulation phase is over and the distribution phase can begin. For example, in a deferred annuity plan, you may have a vesting date which is 10 to 30 years away depending on your age at entry. You will continue to invest or stay invested till the vesting date. After the vesting date or age, you can start receiving the pension or withdraw the money from the plan.

The steps may differ from plan to plan. However, you can buy the online retirement plans following the steps below:

  • Retirement Calculator: Use a retirement calculator to estimate your corpus need and expected monthly investment amount to achieve it
  • Choose Plan: Select the online retirement plan you want to start investing in
  • Contact Information: Fill in the personal details including the contact information. Make sure to put the correct e-mail ID which you can access since all future communication about the policy will take place via e-mail.
  • Define Your Investment: Select the goal, investment term, investment frequency and amount you want to invest (based on the calculator estimate)
  • Select Fund Allocation: Online retirement plans give you the option to invest in multiple assets including equity funds. You can select the ratio in which your premium will be allocated to these funds as per your risk appetite. Then select one of the portfolio rebalancing strategies.
  • Select Withdrawal Plan: You can withdraw money based on set milestone or systematically from the plan after the lock-in period. Select the options for withdrawal as per your plan.
  • Review Plan & Investment Details & Complete the Application Form

You can pay the premium amount before or after completing the application form to start investing.

The best time to plan your retirement is when you are planning your career. However, this may not be the time when you really start investing money for your retirement. You must start investing in your retirement plan as soon as you start earning.

Retirement is the only financial goal you cannot repair with other means of funding like a loan. Thus, developing the habit of investing with every income you have is the best way to have a comfortable retired life.

Insurance allows your family, especially your dependent spouse to continue living without financial worries if anything happens to you. Also, insurance may help you save enough for retirement in case of permanent disabilities. Additionally, life insurance retirement plans allow you to build a good retirement corpus with bonus additions.

Yes, you can change the nominee of the policy anytime you need. If you are using an Electronic Insurance Account (EIA) to manage your policies, you can change the nominees anytime from this account. Otherwise, you can contact the customer care to update the nominations on your policy.

You can opt for auto-debit of the premiums from your savings account. You can also pay the premiums online using your debit card, credit card or a payment wallet.

You can get Rs. 1 Core pension plan using the online retirement calculator. The calculator will assess your eligibility and provide you with the probable monthly or annual investment to achieve the goal. If the amount seems feasible you can complete the purchase online or set an appointment for a qualified advisor to help you in the process.

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