Immediate vs Deferred Annuity
Income now or income later, and what each one means for the insurer's books.
An immediate annuity is bought with a lump sum and starts paying income straight away, usually within a year of purchase. A deferred annuity starts paying only at the end of a deferment period; until then the money builds up, and premium can be paid as a single, limited or regular premium.
For IC-26, the difference matters as much for the insurer's books as for the buyer. The two are treated differently in the expenses of management limits, and both put longevity risk on the insurer for as long as the annuitant lives.
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Immediate vs Deferred Annuity
When income starts
Immediate annuity
Right away, usually within a year of purchase
Deferred annuity
At the end of the deferment period
How premium is paid
Immediate annuity
Single premium (lump sum)
Deferred annuity
Single, limited or regular premium
Before payouts start
Immediate annuity
No build-up phase
Deferred annuity
Deferment period: the corpus accumulates
Product category under IRDAI
Immediate annuity
Non-linked non-participating
Deferred annuity
Non-linked non-participating
Annuity once it starts
Immediate annuity
Guaranteed for life under the chosen option
Deferred annuity
Commences at the end of deferment and is guaranteed for life
EoM allowance (single premium)
Immediate annuity
5% of single premiums
Deferred annuity
5% of single premiums
EoM allowance (more than one premium, non-group)
Immediate annuity
Not applicable
Deferred annuity
15% of first-year premium, 6% of renewal premium
| Immediate annuity | Deferred annuity | |
|---|---|---|
| When income starts | Right away, usually within a year of purchase | At the end of the deferment period |
| How premium is paid | Single premium (lump sum) | Single, limited or regular premium |
| Before payouts start | No build-up phase | Deferment period: the corpus accumulates |
| Product category under IRDAI | Non-linked non-participating | Non-linked non-participating |
| Annuity once it starts | Guaranteed for life under the chosen option | Commences at the end of deferment and is guaranteed for life |
| EoM allowance (single premium) | 5% of single premiums | 5% of single premiums |
| EoM allowance (more than one premium, non-group) | Not applicable | 15% of first-year premium, 6% of renewal premium |
Key Terms
- Annuitant
- The person who receives the annuity. A joint life annuity has a primary and a secondary annuitant.
- Purchase price
- The premium paid to buy the annuity. Some options return it on death.
- Deferment period
- The gap between buying a deferred annuity and the first payout.
- Vesting
- The date a pension plan's accumulation ends and the proceeds are used to buy an annuity.
- Commutation
- Taking part of the vesting proceeds as a lump sum instead of annuity. Up to 60% on pension products.
Annuity Options IRDAI Permits
Under the 2024 Master Circular on Life Insurance Products, immediate and deferred annuities (individual or group) may offer these options. Every annuity product must offer at least the first two.
- check_circleLife annuity.
- check_circleLife annuity with return of purchase price.
- check_circleAnnuity certain for a specific period, and life thereafter.
- check_circleJoint life annuity (100%, 50% or another percentage to the secondary annuitant) with return of purchase price on the last survivor's death.
- check_circleJoint life annuity without return of purchase price.
- check_circleVariable annuity payout with a minimum guaranteed amount. Payouts follow a public benchmark, the minimum guaranteed rate cannot fall below 60% of the rate at inception, and the annuitant partly bears the investment risk.
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Where a Deferred Pension Plan Ends: The Vesting Options
- check_circleUse the entire proceeds to buy an immediate or deferred annuity from the same insurer at the then prevailing rate.
- check_circleCommute up to 60% and use the rest to buy an annuity.
- check_circleBuy the annuity from another insurer, using not more than 50% of the proceeds net of commutation.
- check_circleIf the proceeds are too small to buy the minimum annuity, they may be paid as a lump sum.
- check_circleIf the policyholder dies during deferment, the nominee may buy an annuity with all or part of the proceeds, or withdraw them.
How the Insurer Accounts for Annuities
Single premium on immediate or deferred annuity
Treatment
EoM allowance of 5% of single premiums
Source
EoM Regulations 2024, Reg 8(1)
Deferred annuity and pension, more than one premium (non-group)
Treatment
EoM allowance of 15% of first-year and 6% of renewal premiums
Source
Reg 8(7)
Annuities being paid
Treatment
EoM allowance of three fourths of one per cent of all annuities paid in the year
Source
Reg 8(8)
Annuity payments
Treatment
Accounted for when due
Source
HDFC Life and SBI Life accounting policies
Reporting segment
Treatment
General Annuity and Pension, inside the Linked, Non-linked Non-participating or Non-linked Participating segment
Source
Reg 18
| Item | Treatment | Source |
|---|---|---|
| Single premium on immediate or deferred annuity | EoM allowance of 5% of single premiums | EoM Regulations 2024, Reg 8(1) |
| Deferred annuity and pension, more than one premium (non-group) | EoM allowance of 15% of first-year and 6% of renewal premiums | Reg 8(7) |
| Annuities being paid | EoM allowance of three fourths of one per cent of all annuities paid in the year | Reg 8(8) |
| Annuity payments | Accounted for when due | HDFC Life and SBI Life accounting policies |
| Reporting segment | General Annuity and Pension, inside the Linked, Non-linked Non-participating or Non-linked Participating segment | Reg 18 |
The Risks the Insurer Carries
- check_circleLongevity risk: annuities are priced on the annuitant's survival. An annuitant who lives longer than expected costs the insurer money, the mirror image of early death on a life policy.
- check_circleRising life expectancy makes annuity and pension liabilities harder to estimate.
- check_circleInvestment risk: annuities are non-participating, so the insurer bears the investment risk on the guaranteed rate. Only under the variable payout option is part of it passed to the annuitant.
Exam Traps
Annuity products are non-linked non-participating under IRDAI's 2024 Master Circular. Every annuity product must offer life annuity and life annuity with return of purchase price. Commutation on pension vesting is up to 60%; buying from another insurer is up to 50% of the proceeds net of commutation. The EoM allowance on annuities paid is three fourths of one per cent, not 5%.
FAQs
What is the difference between an immediate and a deferred annuity?expand_more
An immediate annuity is bought with a lump sum and pays income straight away, usually within a year. A deferred annuity pays only after a deferment period, and its premium can be single, limited or regular.
What is an immediate annuity plan?expand_more
A plan where you pay a single premium (the purchase price) and the insurer starts paying a regular income, monthly, quarterly or yearly, for life or under the option you choose.
Can an annuity return the purchase price?expand_more
Yes. Life annuity with return of purchase price is one of the two options every annuity product must offer under IRDAI's 2024 Master Circular.
How much can be commuted at vesting of a pension plan?expand_more
Up to 60%. The rest is used to buy an immediate or deferred annuity, and up to 50% of the proceeds net of commutation can be used to buy it from another insurer.
What is the expense allowance on annuity business?expand_more
Under IRDAI's 2024 EoM regulations: 5% of single premiums on immediate or deferred annuities, 15% first-year and 6% renewal on non-group deferred annuity and pension policies with more than one premium, and three fourths of one per cent of annuities paid.
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