An annuity policy should find a place in its basket of retirement investments. The return on investment may not look attractive, but remember that it is not an investment, but a protection from the risk of staying for too long. For this, the life insurance company charges you premiums. Surviving for 30 years after retirement is now common 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 you start a pension immediately when you pay the purchase price, and a deferred annuity where you deposit a fund over the years and it is used to purchase the annuity on a pre-determined ‘vesting’ date – usually On each retirement date. With more than 25 companies and hundreds of options, which policy to buy is a difficult question.
Standardized policies
The recent strategy of the Insurance Regulatory and Development Authority of India (IRDAI) is to design standard policies as well as work on awareness as well as reference points for product benefits and costs.
A standardized 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 estimate the pricing matrix.
Enter Enter ‘Saral Pension’, the standardized immediate annuity policy to be introduced to all life insurers from 1 April.
“XYZ Life Insurance Company Saral Pension,” as they will be called, will have to create a single-premium, non-linked, non-participating instant annuity plan. Non-linked means that your premium will not be invested in the capital markets, but in a safe set of baskets according to the rules. Non-participation or non-equal means that the policy will not participate in the profits of such investments. Your annuity will be fixed and there will be no risk and no promise of bonus without any risk.
Simple pension will have only two annuity options. The annuity for life with a 100% purchase price and the joint life annuity with a 100% annuity on the primary annuity, for the secondary annuity upon their death and then, the return of the 100% purchase price on the death of the last survivor.
This saves you from being free from 8 or 10 options and gives clarity of benefits and their pricing. This policy will cover male, female and transgender lives in the age group of 40 to 80 on an individual basis.
The minimum annuity of monthly if 1,000, if monthly quarter 3,000, quarterly, half 6,000, if half yearly and, 12,000 if yearly, all arrears are to be offered, and the purchase price depends on the target annuity amount.
There is no maturity benefit, but the loan is possible six months after the policy starts. The rate of interest will be equal to the rate of 10-year government securities, not more than 1 April of that year, at more than 200 basis points. The loan payable is charged to the annuity and capped so that the interest does not exceed 50% of the annual amount.
After six months from the date of commencement, the policy can be surrendered upon diagnosis of an annuity (s) or a specified critical illness of any of their children. The surrender value is 95% of the purchase price minus any outstanding debt and interest and the policy ends thereafter.
While pricing is left to insurance companies, the band-wise annuity rate is to be derived based on the purchase price categories. Less than 2 lakhs, less than ₹ 2 lakhs to ₹ 5 lakhs, less than ₹ 5 lakhs to ₹ 10 lakhs, less than ₹ 10 lakhs to ₹ 25 lakhs and ₹ 25 lakhs and above.
Sounds like a lot of details? Remember, data is relevant only when there is a reference point for comparison. So, you can either buy the standard policy yourself or use it to explain the cost benefit of comparable policies.
(The author is a business journalist specializing in insurance and corporate history)
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