Annuities, or pension policies, which form a very large and promising market and over which life insurers have a monopoly, haven’t realised their true potential in India as Income Tax on pensions takes the sheen away.
Unlocking potential
However, here are some sweeteners that unlock the investment’s potential for the policyholders.
IRDAI, in its recent master circular on life insurance, says that insurers may offer loans under annuity policies. It also specifies more flexibility in buying an annuity policy at the time of vesting (when the deferment period, if any, ends and the pension payout begins) or at the time of surrender. The nominee, too, gets more flexibility if the policyholder dies before vesting. What truly unlocks policy value at times of need is the new partial withdrawal facility.
Partial withdrawal
In the case of individual pension policies during the deferment period, the policyholder can make a partial withdrawal under certain terms and conditions. Up to 25% of the total premiums paid can be withdrawn after three years of commencement of the policy. The partial withdrawal will be counted towards commuted portion of the surrender/vesting benefit. Yet, the policy will not be terminated and the death or health sum assured cannot be adjusted downward due to the withdrawal.
This facility is allowed only three time during the deferment period and for stipulated reasons, somewhat like premature withdrawal from an employee or public provident fund account. They include higher education/ marriage of a child, acquiring a first home and for medical expenses. Most interestingly, two permitted reasons for withdrawal are skill development/ re-skilling or any other self-development activities and the establishment of own venture or any start-ups.
Freedom on buying annuity
When the annuity policy vests, or when you surrender it, you can commute 60% of the accumulated amount and have to use the rest to buy an annuity from the same insurance company you have the policy with. Now, you have the flexibility to use 50% of the policy proceeds, net of commutation, to buy an annuity policy from any other insurance company. If the policy proceeds net of commutation are not enough to buy an annuity, you can withdraw the entire amount.
Should the annuity policyholder die during the deferment period, the nominee can commute up to 60% and use the rest to buy a policy (and withdraw it if its insufficient to buy an annuity) or, can simply withdraw the entire policy proceeds.
And lastly, the loan. Life insurers now have to offer policy loans, a definite breather to those contributing to retirement, but need funds urgently to tide over bad patches.
This is only for policies with the ‘Return of Purchase Price’ option (one of the half-a-dozen options when you start a deferred annuity including annuity for life or guaranteed annuity for a certain number of years or joint annuity with spouse). The loan amount is also based on the eligible surrender value and obviously only during the deferment period and not after the vesting of the policy.
(The writer is a business journalist specialising in insurance & corporate history)