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Business News/ Money / Personal Finance/  Why should you consider annuity products amid falling interest rates? Here are key reasons
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Why should you consider annuity products amid falling interest rates? Here are key reasons

Investing in annuity products amidst falling interest rates in India guarantees a stable income for life. These products offer fixed interest rates, aiding retirees in financial planning and lifestyle maintenance. Annuities can also serve as legacy planning tools for future financial security.

Annuity products offer a fixed interest rate for life, ensuring retirees a stable income to plan their lifestyle effectively.Premium
Annuity products offer a fixed interest rate for life, ensuring retirees a stable income to plan their lifestyle effectively.

The India Outlook report by Crisil projects the Indian economy to become the world’s third largest economy by 2031 marking its entry into the upper middle-income club of countries.

Historically it has been observed that as economies develop the interest rates fall. With India slated to become a developed economy, a fall in interest rates can be expected. Therefore, the current interest rate scenario offers customers an excellent opportunity to invest in an annuity product and receive guaranteed regular income for life.

Let’s delve into how interest rates have moved in India and how annuity products work. According to RBI, interest rates in the year 2013 were approx. 9% which have fallen to approx. 6.90% in the year 2024. This fall in interest rates adversely impacts customers who are dependent on income from fixed income instruments which needs to be renewed periodically.

Annuity products are unique, the rate of interest at which the regular income will be paid out is fixed at the time of purchase and this interest rate remains constant throughout the customers’ life.

Typically, retirees prefer to receive regular guaranteed income which does not fluctuate. Knowing the cash-flows helps them to plan their lifestyle better. Let us understand this better with the help of an example.

Mr. Rao, on retiring at the age of 58 invests his savings in a fixed income instrument which gives him monthly income. However, a few years later, when his investment comes up for renewal, the interest rate has fallen resulting in a fall in his monthly income. This means he will have to compromise on his standard of living.

Now, let’s consider a scenario where Mr. Rao invests his savings in an annuity product. The rate of interest is locked-in when he purchases the product and this remains constant throughout his lifetime, irrespective of interest rate movements.

Furthermore, if Mr. Rao chooses the ‘Joint-Life’ option in his annuity plan, this will ensure guaranteed regular income for his wife after his demise. Notably, annuity products can also be used as a legacy planning tool if Mr. Rao chooses the ‘Return of Premium’ option. This will ensure the investment made is paid out to the nominee upon the demise of the joint holder, in this case.

As India continues to stay on its journey of becoming a developed economy, interest rates are expected to drop. Therefore, the current interest rate environment provides customers with an excellent opportunity to invest in an annuity product, lock in the interest rate and receive a life-long guaranteed regular income to be financially independent.

Amit Palta, Chief Distribution Officer, ICICI Prudential Life Insurance Company Limited

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Published: 28 May 2024, 12:18 PM IST
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