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Sunday 25 October 2015

Benefits of Pension Products Bundled with Insurance to Consumers

It is estimated that the size of India’s elderly population aged 60 and above is expected to increase from 77 million in 2001 to 179 million in 2031and further to 301 million in 2051. Owing to declining birth rates and longer life expectancy, India’s elderly are growing annually at a rate of 3.8% as against the annual average growth rate of 1.8% of the total population. According to a FICCI-KPMG study, pension reforms held the prospect of enlarging the pension market size from Rs 56,100 crore in 2002 to about Rs 4,06,400 crore by 2025. Further,  as per the study, the existing government administered pension schemes cater only to 12% of India’s workforce, and the pension provided under such schemes are inadequate to cover financial needs of the retirees. There was need for constructing a portfolio with some exposure to equities and international markets with stress on low risk and high returns. For a successful regulatory regime, the three corner stones of product, processes and distribution were stressed. With only LIC and few other life insurance companies active currently in the pension segment there is a huge potential for life insurance companies to expand in this segment. Even PFRDA is regulating only the pension fund management and ultimately will have to transfer the corpus to a life insurance company to provide annuities. There is a great demand for annuity service providers. Pension funds, being long term in nature, support infrastructure investments in a big way.

Pension funds carry long term benefit guarantees. For example, a customer buying a Deferred Pension Policy at age 30, retiring at age 58, can pay periodic premiums over the active service in convenient instalments and upon reaching the age of superannuation, say at age 58, can start receiving a periodic annuity. Up to 1/3rd of the corpus (which is the accumulated value) at age 58 is allowed to be commuted (withdrawn as a lump sum) and the balance 2/3rd is invested in the name of the customer to earn a monthly annuity starting from the retirement age.

Since all life insurance companies are required to give a positive interest guarantee, the customer gets a certain amount of guarantee in the corpus build up or in the form of guaranteed annuities.

Upon superannuation, the corpus is utilised to purchase a Single Premium Immediate annuity from the same insurance company. Annuities are payable depending on the options selected by the customer – It can be a Life annuity, payable during the life time of the Customer and stops upon death or it can be an Annuity certain for minimum period of years, say 5 years, 10 years or 15 years after superannuation, continuation of Pension after death of the annuitant, in the name of Spouse till his/her death etc.

Pension products also carry an assured death benefit which is normally in the form of return of premiums.

Advantages of developing Pension products

  • Building a corpus over a period of time rather than in a short period – Pension plans are vehicles to build a corpus over a period of time – the benefits of starting early in life through a pension policy
  • One vehicle for both corpus building and annuities – Pension products provide one window of opportunity to build corpus as well as annuities through a single insurance company
  • Guaranteed returns - The regulator has prescribed that all insurers must guarantee  non-zero returns in all pension products.
  • Tax benefits for pension premiums under Section 80CCC, up to a limit of Rs 1.50 lakhs per annum along with other eligible investments under Section 80C and 80CCD


Source: www.newindianexpress.com/

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