eServe Newsletter November 2011

Pension plan: Now, a person can draw annuities at 55 years of age

05-Nov-2011 Source : Economic Times By Shilpy Sinha,

The insurance regulator plans to lay a floor of 55 years of age for a person to draw annuities from pension plans as it moves to reduce risks for insurance companies and revive a pension market that’s ignored by private insurers. However, the move may throw a spanner in the works of those planning early retirement.

The plan, which is still in the discussion stage, is also partly aimed at encouraging private insurers to share the burden of the state-owned Life Insurance Corp, which now bears the burden of the entire annuity risk, said two people familiar with the discussions.

"Fixing the age of annuity will solve the problem of longevity risk,’’ said an official at Irda who did not want to be identified. "We are finding out how regulators in other countries manage the pension risk." Pension policies that promise to pay a fixed annual sum to a policyholder till death are seen as risky with rising life expectancy on higher incomes and better healthcare facilities.

Reducing Risk

If an insurer sells a pension policy to a 22-year old with annuity starting at the age of 40, the risk is seen higher if the person ends up living till 80 as the insurer will be paying for 40 years. If the minimum age is fixed at 55, the payments are for just 25 years.

"The risk is more at the younger age," said G N Agarwal, Chief Actuary at Future Generali Life Insurance. Many insurance companies, to market policies easier, had peddled pension policies with annuity payments as early as 35 years which is considered the beginning of the best earning period of individuals. But these companies bear only the lumpsum payment at the end of policy, and the remaining risk of annual payments is borne by LIC, for historical reasons since it has the capabilities.

But the regulator now wants to change that so that one company does not bear the risk and the remaining do not sell policies indiscriminately. "The idea behind fixing the age is that it should not be made to look like a short-term product," said S B Mathur, Secretary General, Life Insurance Council. "It will increase persistency and bring down the risk in the industry.’’ The regulator has been taking steps, including mandating at least a 4.5% annual return on pension policies. But that has backfired with private insurers just dumping the product itself.

Pension products were almost a fifth of the total insurance policies sold in the country till fiscal March 2011. But that has plunged to just 2% of the total in the first half of this fiscal, data from industry representatives show.

The regulator circulated a draft norms for insurance companies on pension products. As per the draft norms, policyholders had to take a compulsory annuity of two-thirds of the corpus at the time of the beginning of annuity payments and the remaining onethird could be withdrawn after the lock-in period ends.

This plan if implemented will also bring the pension market almost on par with the New Pension Scheme backed by the government and regulated by the PFRDA. Under NPS, the retirement age is fixed at 60 years. Also, one can withdraw 40% at exit and use the remaining for buying annuity. "Most of our annuity plans are sold to group. We encounter early annuity in case of dependents. Restricting an age could take away choice from the customer. The regulator should look at fixing only the minimum age," said Sanjiv Pujari Appointed Actuary SBI Life Insurance.

Make your insurance portfolio Direct Tax Code ready

05-Nov-2011 Source : Economic Times

Endowment plans (or traditional plans, in life insurance industry parlance) may see some changes soon. Always a crowd favourite, traditional plans - life insurance plans that give you insurance cover plus a bonus on maturity or the insured amount to your dependants on your death - have regained their lost glory after the recent changes in the guidelines on unitlinked insurance plans, or Ulips.

Ulips had stolen the thunder from traditional plans, but that changed after the new guidelines were introduced. Insurance sellers have again started focussing on traditional plans for attractive commissions. However, the Insurance Regulatory and Development Authority, or Irda, chief J Hari Narayan has expressed concerns over the low protection component in these (traditional) products.

He feels such products may not match the requirements of the Direct Tax Code (DTC) proposals, which would offer tax breaks only if the sum assured is at least 20 times the annual premium. As a result, the regulator is considering prescribing a minimum threshold in terms of the life cover to be offered by such traditional products. Even as the regulator carries on with its deliberations, it is time for you to assess the protection component of your endowment policy.

The tax angle

In fact, this is the right time to do the exercise, as you will be giving finishing touches to your tax planning investments. You can also expect calls from insurance agents, who would try to sell you policies that offer the triple benefits of tax-saving, insurance and investment. And, most probably, the agent will try to sell you a traditional product.

"Insurance policies entail recurring premium payments and, thus, the decision you make this year may have an impact in the future years, too, if the DTC takes effect in its current form," says Rajesh Srinivasan, senior director - tax, Deloitte India. The DTC is likley to come into effect from April 2012.

Ideally, it is best to address the objectives of insurance, investment and tax-saving separately. However, if you have decided to choose insurance this year to reduce your tax outgo, it would be wise to keep an eye on the annual premium payable and the other terms and conditions of the policy Ensure that the premium does not exceed 5% of the sum assured. Also, see if the endowment plan comes with a decreasing cover option, and if it does, whether it’s likely to fall short of your requirements any time in future.

Secure your family's interests

Apart from the tax implications, you need to remember that the primary purpose of taking a life insurance policy is to provide for your family financially on your death during the tenure of the policy. However, due to blind reliance on agents’ advice and lack of awareness or research, it is not rare to hear of policyholders being stuck with multiple policies - for instance Ulips, endowment, moneyback and pension policies - and yet being low on cover.

The total premium payout may run into lakhs of rupees a year, but the amount that the policyholder’s dependants may get in his / her absence may not be enough to fulfil their needs.

Therefore, the first step while buying insurance or reviewing your portfolio is to find out if the current policies add up to your ideal protection requirement. There are various methods of determining this figure, but as a thumb rule, financial planners suggest that the sum assured should be at least 100 times your current monthly income.

Weeding out the undesirables

Now, after a review, if you feel that your portfolio is not overloaded with policies and that you need to boost the sum assured, you can simply go for a pure term life policy - the cheapest and the most-recommended form of insurance.

Buying such policies online will reduce your premium further. However, if you find yourself in a situation where the protection element is minimal despite the presence of several policies, the solution could be a bit more complicated. For, it would necessitate ending some policies, and, if required, replacing them with requisite term cover.

You need to take into account several factors, including the cost structure of your policies, returns, tenure, number of policy years completed and the cost of acquiring a new policy, before arriving at a decision.

"Low-yield traditional policies can be converted into paid-up ones, if it does not make any sense to continue with them," says Suresh Sadagopan, certified financial planner, Ladder7 Financial Advisories. "One of the things to look for is how much cash a policy is sucking in and what kind of returns one can expect if the policy is continued with. One can figure out based on conservative estimates what an endowment or moneyback policy has offered as bonus in the past."

An endowment policy acquires a surrender value after completing three policy years. "However, the decision to surrender or make a policy paid-up also depends on a person’s circumstances. There are certain people who may not be able to get new policies. In such cases, we take a call on keeping the policy on if it does not pose a cash-flow problem," Sadagopan says.

In case of Ulips, the lock-in period is five years for plans issued after September 1, 2010. The accumulated funds of the Ulips discontinued before five years will be locked in and paid out on the completion of this period. Here, you can look at the increase sum assured option, too, but you need to bear in mind that even if premiums do not go up, the amount allocated towards investments will go down, as the mortality charges will certainly see a rise.

In short, you would do well to take a cue from the regulator and evaluate your insurance needs and the level of preparedness that your current policies offer, particularly if they are endowment products with low insurance component.