The market is flooded with investment options that promise you a cozy retirement and a tidy nest egg. Various life insurance companies offer dedicated plans to create a retirement corpus and provide a regular income in your golden years.
Retirement insurance plans are essentially split into two phases. One is the accumulation phase, during which you pay regular premiums that get accumulated over a period of time. The second is the payout phase, when you start getting a regular pension from the corpus created. The age from which you start getting the payout is called the vesting age (ranges between 40 and 70 years).
The amount of regular income you receive post-retirement will depend on the size of the corpus (and the annuity rates). So, is building a kitty through retirement insurance plans a good option?
Here, we look at the broad types of retirement plans for the accumulation phase to see if they are worth the while.
Traditional plans
Like any other traditional savings plan, retirement plans can be participating or non-participating. But most insurers offer only participating retirement plans. In these, at the time of vesting (retirement), the benefit includes the sum assured plus bonuses if any (reversionary and terminal bonus).
The HDFC Life Personal Pension Plus is a traditional participating deferred pension plan. The insured can choose the premium paying term (10-40 years) and the vesting age (55- 75 years of age).
The SBI Saral Pension Plan is another participating traditional pension plan. Here, the vesting age can be between 40 and 70 years.
This policy offers a guaranteed bonus for the first five years, after which reversionary and terminal bonuses, if any, get added to the vesting benefit.
Our view
Similar to any other participating policies, it is important to note that the bonuses depend on the profits of the insurer. You may get bonuses only in the good years — they are not guaranteed. Hence, the returns you earn on such products are difficult to ascertain at the start of the policy.
Even at 8 per cent gross return, the IRR may work out to 5-6 per cent at best. While insurance agents may lure you with the ‘insurance cover’ pitch, remember that the cover under such plans is mostly inadequate.
The key disadvantage with retirement traditional policies is that aside from offering low returns, there are conditions attached to the payouts. According to current IRDAI norms, you can commute 60 per cent of the vesting benefit. The balance will have to be invested in an immediate annuity plan, and the regular income you receive from your annuity plan is taxable at your income-tax slab rate.
Retirement ULIPs
Similar to regular ULIPs, these plans offer market-linked returns. The premiums are invested in equity, debt or a combination of the two based on the risk appetite of the policyholder. The vesting benefit is the higher of the two — fund value or assured benefit. ULIPs are generally for those with a higher penchant for risk. The HDFC Click 2 Retire, ICICI Pru Easy Retirement and SBI Retire Smart are examples of retirement ULIP plans.
HDFC Click 2 Retire lets you choose a vesting age of between 45 and 75 years. In the case of SBI’s Retire Smart, it can range between 40 and 80 years, while with ICICI Pru Easy, it is 45 to 80 years.
Similar to regular ULIPs, these plans carry charges including a policy administration charge, premium allocation charge and fund management charge. But online plans such as HDFC Life Click 2 Retire do not carry policy admin and premium allocation charges.
Our view
While retirement ULIPs offer you the flexibility to choose investment plans based on your risk appetite, and the returns can be higher than in traditional plans, the restriction in payouts — as in the case of traditional retirement plans — is a big dampener. At the end of the accumulation stage, you are allowed to withdraw only 60 per cent of the accumulated amount (tax free), while the balance has to be invested into an annuity. This is a key drawback as you are committing to an annuity beforehand. Remember, your annuity payout will depend on the then rates (at the time of purchase of annuity plan), which may be lower.
Hence, instead of opting for retirement traditional or ULIPs, you may as well go for regular plans that give you more flexibility in using the accumulated corpus. You can choose the investment route (traditional/ULIP) based on your risk appetite.
Whole-life ULIPs
These plans are fast gaining traction. They offer whole-of-life cover (till 99 years) and regular income during your retirement period. For instance, Bajaj Allianz’s LongLife Goal is a whole-life ULIP under which you can choose the Retired Life Income (RLI) option any time during the policy term. Also, you can choose to receive RLI either on reaching 55 years age or after the 10th year of policy, whichever is later. The amount can be up to 12 per cent per annum of your fund value, payable yearly, half yearly, quarterly or monthly.
The RLI percentage can be changed any time. You also have the option to exit the RLI option at any time.
The HDFC Life Click 2 Wealth has a Golden Years Benefit option for retirement planning with whole-life cover. This plan also allows systematic withdrawal from your accumulated fund, which can help generate a retirement income.
Our view
If you are willing to take some market risk, then building your retirement kitty through whole-life ULIPs may be a good option. Bajaj Allianz’s LifeLong has a choice of eight funds across the equity and debt categories while HDFC Click 2 Wealth has 10 fund options. There is no policy administration charge under both policies; HDFC Click2 Wealth has no premium allocation charge while Bajaj Allianz’s LifeLong waives it when bought online. The fund management charges vary from 0.8 to 1.35 per cent of the fund value in the case of HDFC Life, and 0.95-1.35 per cent for Bajaj Allianz.
The key advantage of these policies vis-à-vis a pure retirement traditional or ULIP plan is that there is flexibility in receiving the payouts (no annuity mandate). Also, such withdrawals are tax-free (provided the sum assured is at least 10 times the premium). Remember, though, that the death benefit gets reduced to the extent of withdrawals.
With mutual funds, too, you can invest regularly based on your risk appetite, create a corpus and set up a systematic withdrawal option to meet your retirement needs. However, in that case, the long-term capital gains tax will be applicable.
Bottom-line
If you are looking purely for an insurance option to accumulate your retirement kitty, whole-life ULIPs with withdrawal flexibility may be a good choice. But these may be more expensive than your regular ULIPs. Hence, if you are not looking to create a legacy for your nominees, you can go for regular ULIPs rather than whole-life ones. You will, however, have to invest the corpus efficiently to generate a regular post-retirement income. Also, compare the long-term performance of various ULIPs before investing.
- Retirement traditional/ULIPs
- Regular traditional/ULIPs
- Whole-life ULIPs