It is a happy combination. Pension plans from life insurance companies not only help you save for retirement, but also help create regular retirement income from the accumulated sum (see Pension Plan Demystified). Tax deductions make them a potent investment tool - investments up to Rs 100,000 qualify for deductions under Section 80C.
Evaluate the investment proposition
For long, pension plans have been sold primarily as a tax-saving tool that provided life insurance. The practice still continues. Since you can get a cost-effective cover from term plans, opt only for pure pension plans. With retirement life in India, on an average, stretching to more than two decades, pension investing is becoming crucial.
Also, with a large choice of pension plans, all offering tax deductions, it is important that investment prospects of pension plans are compared.
Participatory policies; security’s flip side
Till a few years back, most pension plans were with-profit or bonus-based. In such plans, the insurers bear the investment risk. Your investment is not at risk, and your returns vary with the profits and surplus, depending on the investment performance of the insurer. But the flip side is that these policies don't disclose the investment performance and the costs incurred on fund management or administration. So, you make do with what is offered. Also, since such plans don't invest in equities, which typically provide high returns in the long term, their returns are in the range of eight per cent. Participatory policies might work for extremely risk-averse people with low income. It may even work for those who want to use it to create a base retirement income, supplemented by income from other sources. But, most of us need the equity exposure that unit-linked pension plans provide
See Also: National Pension System
The unit-linked advantage
In the past three to four years, life insurers, especially private players, have been launching unit-linked plans. They are becoming popular due to their features that provide flexibility In a ULPP, you have to manage the investment risk yourself. Therefore, if retirement is quite some distance away, it makes sense to take higher risk options in such plans, especially exposure to equities. Of course, in this backdrop, you won't be able to put a finger on what you will end up with. Therefore, it becomes important to carefully evaluate the plans based on various parameters
- Loyalty Units – to help grow your funds faster
- Life Stage Investment Program – to manage investments as per your risk preference
- Flexibility to choose your retirement age
- Flexible Premium options
- Flexibility to exercise the pension option on the chosen retirement age
- Tax benefits under section 80C / 80CCC and 10(10A)
Apart from above benefits few companies offer several specialized services. They are as follows :
Upon the unfortunate event of death during the accumulation phase, the company will pay the fund value as a death benefit to your nominee. If the nominee is your spouse, the proceeds can be taken in a lump-sum or used to purchase an annuity.
The vesting date is the date you decide to end the accumulation phase and enter the income phase. You have the freedom to vest at any time after the completion of 5 policy years.On the vesting date, your fund value will be used to purchase an income stream payable for the rest of your lifetime. You have the option to :
- Enter into an income phase with us as per our then available products on your vesting date.
- Enter into an income phase with another life insurer of your choice (open market option).
- Commute up to 1/3rd of your fund value on the vesting date and receive the amount in a lump-sum and tax free (as per the current Income Tax Act) and annuitize the balance 2/3rd to receive a stream of regular income.
- Annuity Phase :
Choose your Plan Benefits. On the date of vesting, you can either :
- Withdraw one third of the policy fund as a lump sum and utilize the remaining portion of the fund to purchase any annuity provided by us then and at the then prevailing rates or buy an annuity from any other Annuity Provider in the market; or
- Utilize the entire policy fund to purchase any annuity provided by us then and at the then prevailing rates or buy an annuity from any other Annuity Provider in the market.
- Upon the death of the Life Insured under a Single Premium Policy which provides a Life Insurance Coverage, the company will pay to the Claimant the higher of:
The Policy Fund Value; or The Life Insurance Coverage Sum Assured (which is always 110 percent of the Single Premium excluding any Rider or underwriting extra premium or top-up Premium (rounded off to the nearest thousand rupees).
- Upon the death of the Life Insured under a Regular Premium Policy which provides a Life Insurance Coverage and the same being in effect, the company will pay to the Claimant the higher of: The Policy Fund Value; or The Life Insurance Coverage Sum Assured (which is always 10 times of the Regular Premium excluding any Rider or underwriting extra premium or top-up Premium).
- Upon the death of the Policy Owner in the case of a Policy without a Life Insurance Coverage, the company will pay the Policy Fund to the Claimant. This would be applicable to both the Single Premium and Regular Premium Policies.
You can surrender the policy anytime after three policy years till the vesting age. The Fund Value less the surrender charges will be paid to you. In case you surrender the policy before the completion of three policy years from inception, then the surrender value will be paid to you at the end of the third policy year.
Addition of Riders
- You can further customize your plan by adding riders to the base plan at a marginal extra cost. Riders can be attached only if life cover has been opted under the policy.
- Accidental Death & Dismemberment Benefit Rider : It provides 100% of coverage in case of death due to accident; loss of more than one limb or sight in both the eyes or in case of loss of one limb and loss of sight in one eye; 50% coverage in case of loss of one limb or sight in one eye.
- Term Rider : It provides additional amount of cover in the event of death of the life insured
- Critical Illness Rider: It provides a cover in the event of life insured being diagnosed as suffering from any of four illnesses specified under the Critical Illness Rider.
- Critical Illness plus Rider: It provides a cover in the event of life insured being diagnosed as suffering from any of the seventeen illnesses specified under the Critical Illness Plus Rider.
- Critical Illness Woman Rider: It provides a cover against several critical illness including woman specific illnesses. Pregnancy complications and congenital anomalies in a new born child.
Tax benefit governed by Section 80 CCC on premiums paid to a maximum of Rs. 1,00,000 and Section 10(10A) on the commuted value of the benefits on the vesting age of the Income Tax Act, 1961. In addition the benefits payable on death will be exempt from tax under Section 10(10D).
Service Tax and other levies
Service Tax and other levies, as applicable, will be levied as per the extant tax laws.