An annuity policy should find a place in your basket of retirement investments. The return on investment may not look attractive, but remember it is not an investment but a protection against the risk of living too long. For this, the life insurance company charges you a premium. Living for 30 years after retirement is common now and the pension policy will fund you. If you live for 35 or 40 years after retirement, it will still be there.
There are two types of annuity policies. An immediate annuity where the pension starts immediately when you pay the purchase price, and the deferred annuity where you accumulate a corpus over years and this is used to purchase an annuity on a pre-decided ‘vesting’ date – usually your retirement date. With over 25 companies and hundreds of options, which policy to buy is the haunting question.
Insurance Regulatory and Development Authority of India’s (IRDAI) recent strategy has been to design standardised policies to serve as awareness as well as reference points for product benefits and costs.
A standardised policy helps you compare pricing across companies for the same set of benefits. Comparing the benefits and pricing of this policy with other policies of the same company in the same category helps you guess the pricing matrix.
Enter ‘Saral Pension,’ the standardised immediate annuity policy that all life insurers have to offer from April 1.
“XYZ Life Insurance Company Saral Pension,’ as they will be called, has to be a single-premium, non-linked, non-participating immediate annuity plan. Non-linked means your premium will not be invested in the capital markets, but in a safe set of baskets as per regulations. Non-participating or non-par means that the policy will not participate in the profits of such investment. Your annuity will be fixed and guaranteed with no risk of loss and no promise of bonuses.
Saral Pension will have only two annuity options viz. annuity for life with 100% return of purchase price and joint life annuity with 100% annuity to the primary annuitant, on their death to the secondary annuitant and then, return of 100% purchase price on the death of last survivor.
This saves you from being befuddled by 8 or 10 options and lends clarity to the benefits and their pricing. The policy will cover male, female and transgender lives in the age group 40 to 80, on an individual basis.
Minimum annuity of ₹1,000 if monthly, ₹3,000 if quarterly, ₹6,000 if half-yearly and ₹12,000 if annual, all in arrears, are to be offered, and the purchase price depends on the target annuity amount.
There is no maturity benefit, but a loan is possible after six months after start of the policy. The interest rate will be equal to the 10-year government securities rate as on April 1 of that year plus not over 200 basis points. The loan is recovered from payable annuities and capped so that the interest is not more than 50% of the annuity amount.
After six months from the date of commencement, the policy can be surrendered on diagnosis of specified critical illness of the annuitant(s) or any of their children. The surrender value is 95% of the purchase price less any outstanding loans and interest and the policy is terminated after this.
While pricing is left to the insurers, band-wise annuity rates are to be derived based on purchase price ranges viz. less than ₹2 lakh, ₹2 lakh to less than ₹5 lakh, ₹5 lakh to less than ₹10 lakh, ₹10 lakh to less than ₹25 lakh and ₹25 lakh and above.
Sounds like a lot of details? Remember, data becomes relevant only when there is a reference point for comparison. So, you can either buy the standard policy itself or use it to interpret the cost benefit of comparable policies.
(The writer is a business journalist specialising in insurance & corporate history)