Why should you consider annuity products amid falling interest rates? Here are the main reasons

Crisil’s India Outlook report forecasts that the Indian economy will become the third largest economy in the world by 2031, marking its entry into the club of upper-middle-income countries.

Historically, it has been observed that as economies grow, interest rates fall. As India is set to become a developed economy, one can expect interest rates to fall. Therefore, the current interest rate scenario provides an excellent opportunity for customers to invest in an annuity product and receive a guaranteed regular income for life.

Let’s take a look at how interest rates have evolved in India and how annuity products work. According to RBI, interest rates in 2013 were approx. 9% which fell to approx. 6.90% in 2024. This drop in interest rates penalizes customers who depend on income from fixed income instruments that must be renewed periodically.

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

Generally, retirees prefer to receive a regular guaranteed income that does not fluctuate. Knowing cash flow helps them plan their lifestyle better. Let’s understand this better with the help of an example.

Mr. Rao, at the age of 58, invests his savings in a fixed income instrument which provides him with monthly income. However, a few years later, when he renewed his investment, the interest rate dropped, leading to a drop in his monthly income. This means he will have to compromise on his standard of living.

Now consider a scenario in which Mr. Rao invests his savings in an annuity product. The interest rate is locked in when purchasing the product and remains constant throughout its life, regardless of interest rate fluctuations.

Moreover, if Mr. Rao chooses the “Joint Life” option in his annuity plan, it will ensure a guaranteed regular income for his wife after his death. Notably, annuity products can also be used as a wealth planning tool if Mr. Rao chooses the “Reimbursement of premiums” option. This will ensure that the investment made will be paid to the nominee upon the death of the joint holder, in this case.

As India continues its journey to becoming a developed economy, interest rates are expected to fall. Therefore, the current interest rate environment offers clients a great opportunity to invest in an annuity product, lock in the interest rate and receive a guaranteed regular income for life to be financially independent.

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