Deferment Periods for Life Insurance Annuities

Are you thinking of retiring soon? If so, what’s your plan for a stable income after retirement? 

Apparently, that’s a hard-hitting question! Especially when you don’t have a regular income after your retirement. But wait! Haven’t you heard of life insurance annuities? If not, this blog is for you! 

Here, we’ll explain everything about life insurance annuities and the role of deferment periods for these annuities. Let’s get started! 

What are Life Insurance Annuities?

Life insurance annuities are plans in which you pay the insurer a fixed amount, either in lump sum or through regular payments. The insurance company, in return, will provide you with a steady income in the future, generally for the rest of your life. 

Simple saying, life insurance annuities are like long-term financial safety retirement plans that you can purchase for yourself. First, you pay an amount to the insurer, and later in the future, you receive a regular pension! 

This way, you can ensure a financially stable future until you die. 

What are Deferment Periods in Annuities?

The certain time period that you have to wait before receiving your regular life insurance annuity income is called a deferment period. A deferment period can usually last up to 1 year or more, based on the contract that you have with your insurer. 

Still confused about the deferment period? Well, consider it as a pause on your retirement income and letting your investment build over time. This way, you receive a comparatively larger payout after the deferment period ends.  

To make it more simple for you, let's understand both life insurance annuities and deferment periods with an example –

Let’s say Raj (45) wants to ensure a steady income after his retirement. So, he decided to invest in a life insurance annuity and paid a lump sum amount of 1 Cr to the insurer. We assume his annuity deferment period is five years. 

For the first 5 years, Raj won’t be entitled to any income, all while his investment is growing, earning interest and dividends. After 5 years, Raj will start receiving regular steady income for the rest of his life. This way, his retirement life will be financially safe and insured. 

How Deferment Periods Impact Your Annuity Payments?

The length of the deferment period plays an important role in determining your annuity payments. Well, it’s directly proportional. 

The longer your deferment period will be, the higher the payout you will be receiving from the insurer.

The reason behind that? With a longer deferment period, your invested money also has a longer time to grow, gaining interest. 

So, does that mean you should all choose a very long deferment period? Certainly NO! 

A longer deferment period also means that you will have to rely on your other savings before the deferment period gets over and you start receiving annuity payments. 

If you are a healthy person with no immediate financial needs, opting for a longer deferment period is a good option. On the other hand, if you are someone with health concerns or immediate financial needs, a shorter deferment period might be a better option. All in all, choosing the right deferment period entirely depends upon your needs and situation.  

What’s an explanation with an example?

Let’s say Vijay and Sanjay both invest ₹20 lakh in deferment annuities. While Vijay opted for a 5-year deferment period, Sanjay chose to wait for ten years.  

Vijay will start receiving his annuity payments quite earlier than Sanjay. However, Sanjay will receive a larger annuity amount than Yuvraj as his investments have more time to grow. 

Types of Deferment Periods in Life Insurance Annuities

Below are some of the types of deferment periods as per life insurance annuities —  

How to Choose the Right Deferment Period

As we discussed earlier, the deferment period has a big impact on the life insurance annuity amount. Let’s understand how you can choose the right deferment period for maximum benefit:

1. Your Age and Health:

Age and health are major factors when it comes to choosing the right deferment period. If you are young and healthy, opting for a longer deferment period is a better option, as you can give plenty of time for your investments to grow. On the contrary, if you have health concerns or have aged and need a stable income sooner, a shorter deferment period is what you should choose.

2. Financial Goals:

What are your financial goals? Make sure you have a proper answer to this question before you choose your deferment period. Analyse how, sooner or later, you will need a steady income. If you have other savings or regular income sources, you may go for a longer deferment period.

3. Risk Tolerance:

A longer deferment period usually means that your investments will be exposed to more market risk. Therefore, if you are someone who prefers certainty and safety, opting for a shorter deferment period will provide peace of mind.

4. Interest Rates:

Check what the future interest rate for your investments could be. If the market interest rates are going up, holding your money for longer can prove to be beneficial. 

Comparing Deferment Periods Across Different Annuity Products

Let’s compare deferment periods of some popular annuity plans in 2024 –

Impact of Deferment Periods on Your Retirement Planning

Life insurance annuities are a great security plan for your retirement. However, it is also important to properly plan your annuity deferment period in order to make sure your retirement can be stress-free.

Let’s understand this with a simple example:

Imagine you are working in a private sector job and will be retiring in 5 years.

Now, there are two scenarios – 

1. You have financial savings that can keep you financially free for the next five years after you retire.
2. You don’t have any savings and will not have any regular income source after retirement. 

In the first case, it is more suitable for you to opt for a deferment period of 10 years so your investments can grow by the period you run out of your savings. 

On the other hand, it is better to choose a 5-year deferment period so that you have a regular source of income just after your retirement. 

Conclusion

We certainly hope that this blog helped you understand the concept of life insurance annuities and how choosing the right deferment period is essential to design the perfect retirement plan! 

Remember, as much as this blog helps you, it is essential to consult a life insurance professional to clear all your doubts regarding life insurance annuities. 

Frequently Asked Questions

Q1. I have a pre-existing health condition. Should I opt for a shorter or longer deferment period for my life insurance annuity?

Ans - Health is a major factor when it comes to choosing the right deferment period. If you have health concerns and need a stable income sooner, a shorter deferment period is more suitable for you.

Q2. What does the indefinite deferment period mean?

Ans - An indefinite deferment period means the life insurance annuity payments start at a future date, triggered by an event (e.g., retirement).

Q3. Should young individuals also get life insurance annuity?

Ans - Of course, getting a life insurance annuity is also a great plan for young individuals to strategise their retirement lives.

Q4. What is the length of a deferment period? 

Ans - There’s no specific length for a deferment period. However, there are multiple factors that affect the same –

• The type of annuity 
• The terms of the contract
• The annuitant's preferences.

Q5. What are the different types of life insurance annuity? 

Ans - There are majorly two types of annuities –

• Immediate Annuities
• Deferred Annuities 
• Definite
• Indefinite