Insurance I Opener

( www.ManishJaiswal.com ) I have been vocal about the virtues of Pension Plan. Personally, I feel they are right plan designed for modern times. With life expectedness growing across the globe including India, it is more prudent to invest your hard-earned money in Pension Plan (also known as Retirement Plan or Annuity) than variable Life Insurance (ULIP). Insurance is a must, even if it is not enforced upon you by statutory laws. When you buy a car, you have to take Auto (Motor) Insurance and when you run a business, Workmen Compensation (WC) is an integral part of your business expense because you can’t escape that. Of course, based on your current income and future cash-flow needs, you also end up taking Life Insurance which is good. So, what is this new phenomenon called Pension Plan in India?

source - www.Rediff.com

Pension Fund Regulatory and Development Authority (PFRDA), a new Govt. of India statutory body (in similar lines of IRDA) has been constituted to regulate Pensions (Products, Investments, Producers and Consumers) in the country. It is a welcome move and will further push India’s savings. Although Pension or Annuity is a matured concept in the western world and generally fall into Life Insurance practice, in India this is indeed a new concept. Essentially, Pension Plan means, as name suggest, a promise to give you pension when you retire. Now, naturally no Government is involved here who guarantees a pension month on month after your long service, so institutions (namely Insurance carriers), are taking up the role of giving that promise of pension. We know there is no free lunch in the Corporate World, so basically your Pension Plan is just the reflection of your savings over period of time. If you are parking big money while you are working on your Pension portfolio, you will get bigger share when you retire. Yes, we have to acknowledge that your monthly or yearly contribution will get accumulated in a bigger pool and that will get invested by professional investors (read fund managers) who has a better probability of giving you returns when you retire. No guarantee though. The concept of pooling of individual personal savings (or group) with large number of people (or group) gives rise to smart and innovative products. Insurance companies being into the business of taking risk, bundle the element of Life Insurance, thus making Pension Plan (PP) far more attractive.

From the above, it is clear that Pension Plan is a promise of payment in future. So, it is important that you know where you are investing your money. A company that is looking promising today may not exist when you would retire. So, more than return on investment, you must look at the viability of the plan and promoters track record. Pension Plans are not mutual funds, where you are seeing your investment rise or fall and you have an ability to cut your losses by getting out of the market and getting in at your choice. Pension Plan is a long term investment, in fact the final investment of your life to give you company and solace when you retire, hence PP must be chosen with good vetting process.

A quick definition of Pension Plan (PP) Pension plans (also referred to as retirement plans or Annuity) are offered by insurance companies to help individuals build a retirement corpus. On maturity this corpus is invested for generating a regular income stream, which is referred to as pension or annuity. The option of receiving monthly/quarterly/half-yearly pension is available with most life insurance companies. Pension plans are distinct from life insurance plans, which are taken to cover risk in case of an unfortunate event.

Difference between conventional life insurance plans and pension plans There are some fundamental differences between life Insurance Plans and Pension Plans, with the objective behind both of them, being the most important. Life insurance plans aim at covering the risk from an unfortunate event. Pension plans on the other hand work on the opposite scenario that if an individual survives beyond an age (retirement age), he / she will need to provide for himself / herself. Though insurers may try to sell you a life cover bundled with your pension plan, stay with your pure term policy and buy a pure pension plan to maximize post-retirement benefits. Select a plan that gives the maximum maturity value. Post retirement, you can even ask your insurer to transfer all the funds to another that gives a higher pension, at no extra cost.

However, since the tax benefit on such plans is limited to Rs 10,000, investments in such plans have been somewhat subdued. Apart from the tax benefits, it is important that individuals evaluate pension plans from a retirement planning perspective.

Types of Pension Plans Insurance companies offer two kinds of pension plans - Endowment and Unit linked.

'With Cover' and 'Without Cover' Plans Pension plans are also classified as 'with cover' and without cover' plans. The 'with cover' pension plans offer an assured life cover (i.e. sum assured) in case of an eventuality. Under the 'without cover' pension plan, the corpus built till date (net of deductions like expenses and premiums unpaid) is given out to the nominees in case of an eventuality. There is no sum assured in this case.

'Immediate Annuity' Plans and 'Deferred Annuity' Plans Pension plans are also classified as 'immediate annuity' plans and 'deferred annuity' plans. In case of immediate annuity plans, the annuity/pension commences within one year of having paid the premium (which is usually a one-time premium). The premium paid for the immediate annuity policy is also known as the purchase price. Currently in India, very few life insurance companies offer immediate annuity plans. LIC's Jeevan Akshay II is an example of an immediate annuity pension plan. In case of deferred annuity, the annuity/pension does not commence immediately; it is 'deferred' up to a time, which is decided upon by the policyholder. For example, if an individual buys a pension plan with tenure of 30 years (also known as the 'deferment period'), then his annuity will begin 30 years hence. Deferred annuity premiums can be paid as a 'single premium' or as regular premium. Presently, most pension plans available are deferred annuity plans.

Options available to individuals on pension plans Lifetime annuity without return of purchase price: Under this option, the individual receives pension for as long as he lives. The pension ceases on occurrence of an eventuality and the insurance contract comes to an end.

Annuity for life with a return of the purchase price: If this option is exercised, the individual receives pension till he is alive. In the event of an eventuality, the purchase price of the annuity is paid out to his nominees/beneficiaries. Purchase price here means the maturity amount, which includes the basic sum assured plus the bonuses/additions, if any.

Lifetime annuity guaranteed for a certain number of years: Under this option, the individual receives a pension for a certain number of years (as prescribed by the plan) irrespective of whether he is alive for the said period or not. A major positive of this option is that, if he survives the period, he continues to receive pension for the rest of his life. For example, if the individual has opted for 'Lifetime annuity guaranteed for 25 years', and he meets with an eventuality after only 5 years, then his nominees will keep receiving annuity for the remaining 20 years (i.e. 25 years less 5 years). After the said 25-year period, the annuity will cease and the pension plan will draw to a close.

Joint life/ Last survivor annuity: The individual receives a pension till he is alive. In case of an eventuality, his spouse receives the pension. Apart from the options mentioned above, some companies also offer both, 'with' and 'without return of purchase price'. Under the 'Joint life / last survivor annuity with return of purchase price', in case of an eventuality to both the individual as well as his spouse, the purchase price of the annuity is 'returned' to the nominee. I am happy to share my choice, though it is very early to pronounce the winner and looser. Any Insurance or Investment Pundit claim to know the future value of any of the existing plans is just being ignorant. There are trends which may give some idea which plan to choose and which to ignore.

Some of the good plans that come to my mind include… • Baja Allianz Pension Plans • LIC Pension Plans • SBI Pension Plans • Tata-AIG Pension Plans • Birla Sun Life Pension Plans • ICICI Prudential Pension Plans

Take a monthly redemption plan. You may start investing little now (age bracket 20-30) and higher amount when you are at peak of your career (age bracket 30-45). As discussed, pension plans help individuals prepare for their retirement needs. Not only do they aid in building a corpus over a period of time, but they also provide income for life. That is why it is important that individuals include pension plans while conducting their retirement planning exercise. Be in touch with your Insurance Broker who will be in position to give you multiple plans suiting your needs. Remember, 3 things before signing for the Pension Plan (PP).

• Brand of the Company

• Balance Sheet of the Company

• Business Model of the Company

If you are convinced that this company will survive for next 30-50 yrs, go ahead and invest.

Good Luck and Invest well.

Manish K. Jaiswal Insurance Professional - USA manishkumarjaiswal2001@yahoo.com