In summary

A variable annuity is a payout option linked to a public benchmark. It combines a minimum guaranteed annuity rate with a variable component, so the total payout can change.

• The benchmark formula is set out in the product documents. Payouts may be recalculated quarterly or less often.
• IRDAI permits this option only with specified individual or joint-life annuities that include return-of-purchase-price terms.
• The minimum guaranteed annuity rate must be at least 60% of the applicable initial annuity rate.
• The market-linked part can rise or fall, and the annuitant shares some investment risk.

To compare other life insurance savings options, view available life insurance plans and their terms, or get a customised quote for a savings plan.

Variable annuity: At a glance

An annuity is designed to provide regular income in return for a purchase price or premium. Under the variable payout option, your income has a guaranteed component and a variable component. The latter may change as the benchmark moves.

This structure is different from a unit-linked insurance plan (ULIP), where you may select from available investment funds. A variable annuity payout follows the benchmark and calculation method specified in the policy. You should not assume that you can select or switch between equity, debt or balanced funds.

It is also different from a regular life insurance plan that provides death cover. A return-of-purchase-price option under an annuity is a specific payout arrangement for the nominee or surviving annuitant. It is not the same as a separate sum assured for life cover.

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• Potential for a higher payout: The benchmark-linked component may increase when the benchmark moves up. However, it can also decrease when the benchmark moves down.
• Minimum guaranteed annuity rate: IRDAI requires the minimum guaranteed annuity rate under this option to remain at least 60% of the applicable annuity rate at policy inception.
• Income for life: The permitted annuity structures can provide income for the lifetime of the annuitant, subject to the selected option and policy conditions.
• Return of purchase price: Specified individual and joint-life options provide for the return of 100% of the purchase price on death, subject to the conditions of the policy.
• Immediate or deferred options: Depending on the product, you may be able to start receiving annuity income soon after purchase or after a deferment period.

These features can support retirement planning, but they do not mean that the entire payout is fixed or that the income will automatically keep pace with inflation.

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Here is how the process generally works:

1. Choose an immediate or deferred annuity: With an immediate annuity, payouts begin soon after purchase. With a deferred annuity, payouts start after the selected deferment period.
2. Select an eligible payout option: The variable payout option is available with specified individual and joint-life annuity structures that include return-of-purchase-price conditions.
3. Pay the purchase price: The payment method depends on the product. Deferred annuities may offer single, limited or regular premium payment options.
4. Understand the payout calculation: Your annuity income includes a guaranteed component and a variable component linked to a publicly available benchmark.
5. Receive periodic income: The variable portion is calculated using the policy's formula. The benchmark may be reviewed quarterly or less frequently, so the amount you receive can change.
6. Understand what happens on death: The return-of-purchase-price and joint-life options determine what the nominee or surviving annuitant receives.

How does the minimum guarantee work?

IRDAI specifies that the minimum guaranteed annuity rate under the variable payout option cannot be lower than 60% of the applicable annuity rate at the beginning of the policy.

For example, if the applicable initial annuity rate is 7% per year, the minimum guaranteed rate must not be lower than 4.2% per year throughout the policy. This is an illustration of the regulatory requirement, not a quoted rate for a particular customer or product.

A variable annuity may suit someone who can accept some variation in retirement income. If you need a fixed and predictable amount for essential monthly expenses, compare it with fixed annuity options as well.

Here are the key differences:

An important distinction in India: Under the Insurance Regulatory and Development Authority of India's (IRDAI) Master Circular on Life Insurance Products, 2024, life insurers can offer a variable annuity payout option with a minimum guaranteed annuity amount. These annuity products fall under the non-linked, non-participating category. Therefore, do not automatically assume that an Indian variable annuity is linked to stock market or mutual fund performance, as is common with some variable annuity products in overseas markets.

Before choosing between the two, compare the purchase price, payout amount, payment frequency, minimum guaranteed income (where applicable), and return-of-purchase-price conditions. This will help you understand how much regular income you can expect and whether the annuity option matches your retirement needs.

Consider these points:

• Check the benchmark: Find out which publicly available benchmark the insurer uses. Understand how its movement affects the variable component.
• Read the payout formula: Check how the insurer calculates the variable portion and how frequently the benchmark is reviewed.
• Understand the guarantee: Check the minimum guaranteed annuity rate and the assumptions used in the benefit illustration. Do not interpret the 60% rate floor as a guarantee of 60% of your purchase price.
• Compare the annuity options: Review the available individual and joint-life options. Check when the purchase price is returned and what happens after the primary or secondary annuitant's death.
• Review the payout frequency: Check whether the product offers monthly, quarterly, half-yearly or annual payouts. Available frequencies may differ between options.
• Check access to your money: Read the surrender conditions and find out whether the policy allows any access to the purchase price after you begin receiving income.
• Understand charges and optional features: Review all charges in the policy documents. If an optional rider is available, check what it covers and whether it carries a separate premium.
• Review the tax treatment: Understand how your annuity income and any death-related or surrender payment may be taxed.

Do not compare products only on the basis of their projected payouts. Review the guaranteed and variable components separately, and consider how each option fits your expected retirement expenses.

Annuity income is generally taxable in the hands of the recipient. The Income-tax Department's guidance states that pension received from an annuity is fully taxable.

The tax treatment of the purchase price, surrender proceeds and payments to a nominee may depend on the annuity structure and whether a deduction was claimed when the plan was funded. Therefore, do not assume that a variable annuity offers tax-deferred or tax-free growth.

For tax years beginning 1 April 2026, refer to the Income Tax Act, 2025 and the applicable provisions. Your tax position may differ based on your circumstances and the policy terms.

Tax laws are subject to change. BFL does NOT provide Tax/Investment advisory services. Please consult your advisors.

A variable annuity can form part of your retirement income plan if you are comfortable with payouts that partly change with a public benchmark. It combines a minimum guaranteed annuity rate with the possibility of a variable payout, but the income is not entirely fixed.

Before choosing one, review the benchmark, payout formula, guaranteed rate, return-of-purchase-price conditions, access to funds and tax treatment. Compare it with fixed annuity options to understand which structure better matches your expected retirement income needs.