What is an Accumulation Period?
In a life insurance policy, the accumulation period is the duration for which the life insured pays the premium regularly for the life insurance scheme or plan in question. During this period, a life insurance policy accumulates wealth or funds for retirement purposes, applying to both retirement and deferred annuity plans (also called pension plans).
The accumulation period in the context of a deferred annuity or a pension plan is the time when the annuitant is contributing to the annuity and increasing the value of their annuity account. This is frequently followed by the annuitization(vesting/payout) phase, in which the annuitant receives guaranteed payments for a set period, which is usually the rest of their life.
How and When to Decide Accumulation Period?
The length of this annuity accumulation phase has to be decided at the beginning of the policy. Based on the time left till their retirement and present age, the customer must select the right accumulation period of the annuity. Once this expires, the policyholder can get access to the accumulated capital over a period. Beginning early is the best way to build up a sizable corpus, ensuring higher monetary payouts at the conclusion of the accumulation period.
For example, if you purchase a retirement plan at an age of 30 years with a desire to get a monthly income from the age of 60, you would pay the premium until the age of 60. In this case, the accumulation period is 30 years (60 years – 30 years). Based on the size of the corpus you require; you will have to periodically pay the premiums toward your annuity plan to get the desired payouts in their retirement.
Factors to Consider before Committing to an Annuity with Accumulation Period
Before we get into which factors you need to consider while choosing an annuity with accumulation phase, it is important to understand one thing: annuities are broadly categorized into two types- Immediate Annuity and Deferred Annuity. Only deferred annuities have an accumulation period, as the payout starts at a later date. For immediate annuities, as the name suggests, the payout starts immediately, and hence we will not be discussing them.
Different deferred annuity plans have different characteristics and benefits. When choosing an annuity scheme, you should keep the following five features in mind:
- Security: Since annuities are long-term investments, it is critical to select a plan that provides a high level of security. Ascertain that the company is in a position to meet its obligations. You may also examine shifting factors such as increasing inflation and falling interest rates, among others.
- Returns: The primary goal of investing in annuities is to earn high returns in order to meet your financial demands after retirement. As a result, you can select a plan that provides decent returns while taking into account future inflationary pressures. You must factor in your financial goals while determining the returns you’d require.
- Liquidity: It may become vital to have finances on hand during an emergency. Though it is not recommended to spend the accrued funds, emergency situations may necessitate withdrawals. As a result, you must choose a pension insurance plan that provides some level of liquidity.
- Variability: Depending on your needs, you can choose between fixed and variable annuities. You are entitled to regular fixed payouts under a fixed annuity plan. Variable annuity plans, on the other hand, provide variable returns dependent on market circumstances and asset performance. You can weigh both possibilities and make the best decision based on your risk tolerance.
- Life Cover: If you opt for a pension plan that also provides life cover, then you must think about the level of coverage. To maximise coverage, you can select a plan that protects both you and your partner's lives. In the event of your demise, your partner will get annuity payments. This will assist your family members in meeting their financial obligations even when you are not there.
Siddhant Dubey - Writer & Photographer
Siddhant works as a freelance content writer who is interested in a wide range of spheres from photography and personal finance to cooking. He is also an aspiring photographer striving to showcase life around him through his vision.