Everybody dreams of a comfortable retired life which calls for adequate investment into financial products. There are many investment options that promise to provide the best retirement solution for you. Could insurance-cum-pension products be the one for you?
What is an insurance cum pension product exactly?
It is an investment product offered by the insurer, whereby the investors get both a pension as well as a term life cover.
These plans work in two phases:
1) Accumulation phase – when you pay a premium for your policy and save for retirement
2) Pension phase – when you start receiving a pension from the accumulated retirement kitty based on the chosen annuity plan
For instance, a 40-year old opting for a vesting period of 20 years, invest till he turns 60 years of age and thereafter starts receiving a pension. In case of death of the insured, a lumpsum amount is paid to his family members.
One should consider these factors before investing in pension products:
Insurance cum pension products provide insufficient life cover
They don’t offer much of a cover.
For instance, paying an annual premium of Rs 1 lakh every year will give you a sum assured of about Rs 7 lakh. One estimate requires an individual cover to be about 10-12 times of one’s annual income.
It differs based on the number of earning members in your family, age, number of dependants and so on. And if you already have adequate life cover, buying a pension product could lead to duplication and unnecessary costs.
Mortality charges in Insurance cum pension products
When you buy a pension product, not all you put in gets invested. Besides the usual charges for administration and fund management, there is an additional mortality charge that is charged for providing life cover. Some insurers return the mortality charges at maturity – however, investors lose on the opportunity.
Let’s understand it with an example.
A 30-year old could buy a term cover worth Rs 10 lakh by paying an annual premium of about Rs 1,200 till he is 60 years of age. Investing Rs 1.5 lakh every year into a pension fund for 30 years could get a life cover of about Rs 10 lakh. For that Rs 1,200 is deducted as annual mortality charges. If not for these charges, the investor could have earned Rs 3.25 lakh at maturity by investing in equity funds (at 12% per annum).
There is more to lose from Return-of-Premium (RoP) policies. While RoP investors get all premiums back, in the process they also end up paying an extra premium of more than Rs 18,000 every year. If invested in equities, they could have alternatively built an extra corpus worth Rs 40 lakh.
Poor liquidity of such products
A traditional (non-linked) pension plan, suffers from poor liquidity.
Early exit before the vesting date entails paying high surrender charges.
While an exit from a unit-linked pension plan is easier after five years and without any charges, investors also need to ensure the chosen plan performs well by beating its benchmark indices.
What should investors do?
The only life insurance product you actually need is a term life cover. So, evaluate your insurance needs and buy a term life cover. Consider the financial status (solvency ratio) of the insurer, its claim settlement ratio, brand as well its premium cost before shortlisting one.
And how to secure adequate monthly income post-retirement?
In a pension scheme, about 25% of the retirement kitty is compulsorily distributed as an annuity. It hardly earns 5-6% p.a for the 60-year olds and doesn’t even beat inflation.
Instead, consider investing in mutual funds in which equities comprise a large share – especially while constructing a pre-retirement portfolio. At retirement, the equity component, need not be reduced to zero.
Term policy cover is the only insurance product you need. For your retirement needs, build an equity portfolio and resort to SWP for monthly income needs at retirement.
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