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.
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.
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
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
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.
Choose your Plan Benefits. On the date of vesting, you can either :
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.
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, as applicable, will be levied as per the extant tax laws.
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