Cover at Sunset

Delhi     Print Edition: October 2011

Retirement plans offered by life insurance companies are bundled products, offering the benefits of both insurance and investment. A typical retirement plan has two phases.

The first is the accumulation phase, during which you pay premiums and the money accumulates through the tenure of the plan. The accumulated money is then invested in securities approved by the Insurance Regulatory and Development Authority (IRDA ), the insurance regulator.

These products are designed to protect the value of your principal while at the same time provide you with steady returns.

The accumulation stage is followed by the vesting age, which is the age when you start getting payouts from the kitty. This can be selected by you. The vesting age in most plans is 40 to 70 years. The period when a person gets pension is also called the annuity phase. During this phase, you can withdraw up to 33% of the accumulated amount in one go. The rest is paid as pension.

In the immediate annuity option, a person can pay in lump-sum, instead of over the years, and start getting income immediately. The frequency of payments received can be monthly, quarterly, half-yearly or annually.

*TERMS YOU NEED TO KNOW*

VESTING AGE: The age at which you choose to start receiving pension.

ANNUITY: Regular monthly pension payable to you after your cross the vesting age.

SUM ASSURED: The amount that the nominee receives in the event of death of the insured during the accumulation period.

ACCUMULATION PERIOD: This is the period when you pay premiums to accumulate funds for retirement.

SURRENDER CHARES: Charges levied by the insurer if you end the policy before the date of vesting.

PARTICIPATING PLANS: These plans give a share of the insurer's profit to policy holders. This share is not fixed and depends on the financial performance of the company.

Ulips Geared for Old-age Cover
At present, there are only four unit-linked insurance plans (Ulips) for retirement in the market. All these are single premium plans, that is, you have to pay premium just once, at the beginning of the plan.

Most Ulip retirement plans invest only a small amount in equity-based funds to avoid risk and secure capital. SBI's Smart Pension and IDBI's Retiresurance Milestone Pension Plan have a maximum of 10% equity exposure. HDFC SL Pension Maximus is the most aggressive with up to 30% equity exposure through its Pension Guarantee Fund 1.

If you are young and can invest for a long time, you can opt for higher equity contribution to ensure better potential earnings. Since all available retirement Ulips are single-premium ones, equity can give you huge returns due to the compounding effect.

Product Differentiation
If you want the benefits early in life, HDFC SL Pension Maximus works the best, as its vesting age starts from 40 years. IDBI's Retiresurance Milestone Pension Plan suits those who plan to retire late as the upper vesting age is 85 years.

The maturity benefits vary a lot. All plans, other than ICICI Pru Life Link Pension SP, pay guaranteed fund value or guaranteed vesting value, whichever is higher. In ICICIPru Life Link Pension SP, the minimum guaranteed NAV, or net asset value, is Rs 19.10 at vesting. This means even if the NAV of the plan falls below Rs 19.10, your fund value will be calculated on basis of Rs 19.10.

There is little differentiation between products on other parameters. However, ICICI Pru Life Link Pension SP is the only plan that offers loyalty additions of up to 2.5% of the fund value at the end of the 10th policy year provided that the premium paid is Rs 50,000 and above. (For product details and their charateristics refer to Features of Ulip Pension Plans)

How to View Charges Levied?
ICICI Pru Life Link Pension SP scores average as its premium allocation charges are slightly on the higher side.

However, other charges are similar as in other plans. So, if you do not mind marginally higher charges, ICICI Pru Life Link Pension SP is a good option.

Features of Traditional Retirement Insurance Schemes
Traditional Retirement Plans
Out of 19 traditional retirement plans, 15 are participating ones. Participating plans give a share of profit to policyholders. This share is not fixed and depends on the performance of the company. When a company makes higher profits, the payout rates to its policyhoders are normally reivsed upwards.

Working out Maturity Benefits
Maturity benefits in traditional plans are based on the sum assured. At maturity, a buyer of a participating plan gets sum assured along with guaranteed additions, if any, and bonuses.

The examples of such plans are Bajaj Allianz SwarnaVishranti, ICICI PruForever Life and HDFC Life ClassicPension Insurance Plan.

The retirement plans from Kotak life insurance-Kotak Capital Multiplier Plan and Kotak Retirement Income plan-provide sum assured or accumulated amount, whichever is higher. The returns include guaranteed loyalty additions and bonuses.

In case you have a conservative approach and don't want to risk your money, it is advisable to go for plans that return the sum assured. However, it will be a good idea to choose a plan that offers the higher of sum assured or accumulated amount, if such an option is available. Retirement plans are designed to provide returns only at the age you require them the most, that is, the vesting age.

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Usually, no withdrawals are allowed during the accumulation phase. However, BSLI Secure 58 Plan from Birla Sun Life allows withdrawal from the third policy year. One should be careful not to use the facility recklessly, so that the purpose of saving for old age is not defeated.

Varied Death Benefits on Offer
The good part about traditional retirement plans is that they provide life cover during the accumulation phase. Different plans offer this benefit in different forms. For instance:

>> Bajaj Allianz Swarna Vishranti and ICICI Pru Forever Life give the spouse the option of taking the sum assured in lump sum or buying annuity. ING New Best Years gives the option of deferring annuity if the spouse's age is less than 45 years, encashment of up to 5 per cent of the benefit amount up to 45 years of age and immediate annuity at 45 years.

>> In HDFC Life ClassicPension Insurance Plan and Met Pension-Par, there is an option for return of premium, with or without interest.

>> The third category relates to plans such as Tata AIG Life Nirvana Plus and SBI Lifelong Pension Plus, which provide the facility of withdrawing the accumulated amount. However, in Kotak Capital Multiplier Plan, one can withdraw the accumulated amount for 15 years or up to 75 years of age.

Other Retirement Planning Options

1. Other endowment plans can also be used for retirement planning, but their returns are low. However, special endowment assurance plans such as Max New York Life Partner Plus provide 7.5% sum assured from 61 years up to 75 years of age. At 75 years, you will be paid the sum assured, which can be then used to buy annuity.

Features of Ulip Pension Plans
2. Ulips, such as long-term investment plans, can be used. Although they have a scope for building an unlimited corpus, their downside is not protected and you may end up losing your capital. Capital protection plans such as the highest Net Asset Value (NAV) guaranteed plans can be used, but their charges are higher as compared to retirement plans. These plans assure you payment at the highest NAV reached by the fund during its tenure. However, conditions may vary from company to company.

3. NPS (National Pension System), PPF (Public Provident Fund) and EPF (Employee Provident Fund) are some other options. However, under the proposed direct taxes code, their maturity proceeds will be taxable. This is not the case in insurance retirement plans. There is no insurance or protection cover either.

4. Direct equity or mutual fund investments can also be used to create long-term capital, but prudence will have to be used, as such products do not have any fixed time horizon and maturity value. You will have to time the market correctly to maximise benefits. Fund houses are coming up with options for retirement with fixed lock-in periods, but they still have to figure out issues related to downside and capital protection.

Retirement planning through insurance plans is a good option to maximise your returns. However like in most investment planning exercise, you will be better placed if you start your investment planning early in your financial life and keep investing regularly.

SATKAM DIVYA
Business head, RupeeTalk.Com


Plans that return sum assured at death during accumulation phase
  • Bajaj Allianz: SwarnaVishranti
  • ICICI Pru: ICICI Pru Forever Life
  • Tata AIG: Tata AIG Life Nirvana
  • Tata AIG: Tata AIG Life Nirvana Plus
  • Aviva Life: Aviva Secure Pension
  • Sahara Life: Sahara Amar Jeevan

Planning for retirement
WAYS TO EARN MAXIMUM BENEFIT
  • Start investing early so that you can channelise a larger part of your savings for a comfortable retired life.
  • For retiring, choose an age that coincides with the retirement age in your profession or falls later, so that you get a larger pension.
  • If you want a larger quantum of money in the earlier part of your retired life on a regular basis, go for plans such as Kotak Capital Multiplier Plan which allow immediate withdrawal or partial withdrawals till 75 years of age or for 15 years, whichever is earlier.
  • If you are looking at liquidity before retirement, pick plans such as BSLI Secure 58 Plan from Birla Sun Life that allow withdrawals even during the accumulation phase. This plan also provides pension till 90 years of age. No other plan has such a high vesting age.
  • If you have not bought a separate term plan for death benefits, Kotak Capital Multiplier Plan will be the best choice as it provides the accumulated amount or sum assured, whichever is higher.

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