LIFE INSURANCE BASICS

What are different types of Pension Plans?

Let us see the categories of pension plans according to various criteria:

1. Pension plan with /without life cover

-Pension plans with life insurance cover offers an assured life cover (i.e. sum assured) in case of death during the accumulation phase (policy term).

-Pension plans without life cover, payout the corpus built till date to the nominees in case of death of the policyholder during the policy term. There is no life cover (sum assured) in these plans.

2. Immediate Annuity and Deferred Annuity

-In case of Immediate Annuity plans, the premium amount is paid in one lump sum and the annuity/pension commences immediately after paying the premium depending on the payment frequency (Monthly, quarterly, semi annually or annually).  

-In case of Deferred Annuity, a policyholder pays a regular premium for a certain number of years. This is called the accumulation phase. The money that has accumulated at the end of the accumulation phase is used to buy immediate annuities, which, in turn, generate a regular income for life. For example, if an individual buys a pension plan with tenure of 30 years then his annuity will begin at the end of the 30th year. So deferred annuities are like any other investment product that help you build a corpus by investing regularly.

3. Traditional pension plans and Unit Linked pension plans

During the accumulation phase the individual can choose to invest in a traditional pension plan or a unit-linked pension plan, based on their risk appetite. A traditional pension plan invests most of the funds in Government securities, whereas in a unit-linked retirement plan the investment is in a combination of stocks, bonds, securities, etc.

Most people think about retirement and pension plan when they are 45. This is a common case. In most cases, it may be too little too late. At this stage, investing even large sums of money is of limited help. For instance: If the target amount is Rs.1.5 crore at retirement, the amount to be committed per month (assuming 10% return throughout the period) for someone who wants to invest for 30 years is about Rs.7000 per month. For someone who has only 15 years to go, it may be close to Rs.37, 000 per month. This is due to the compounding effect of the invested amount.

So, starting early is important for a well-funded retirement. You will be better placed if you start your investment planning early in your financial life and keep investing regularly.

Always keep these points in mind while investing for retirement:

• Decide how much income you would require to live comfortably in your retirement years. Consider aspects like increased medical costs, vacations but reduce costs like children's education and rent, if you own your home. You must decide this income on basis of your current lifestyle.

• Determine how much you need to save regularly, starting today, to have the right amount. Start allocating as much as you can towards your retirement kitty. In case you are currently not in a position to set apart the funds required, start with whatever is at your disposal.

• Select the right retirement plan, which will help you meet your post-retirement requirements.

• Start saving now! Then you will have time on your side and can enjoy the power of compounding.

• Systematically invest a fixed amount every month for your retirement years and lead a tension free healthy retirement.

Not only is retirement planning an essential aspect of one's overall financial planning exercise but is also crucial to start early in life. One must always remember that systematic and early retirement planning can help you reduce your financial burden incurred during the retirement years and help you plan for a carefree and financially secured retirement life.