A standard immediate annuity policy with uniform features is all set to be rolled from April 1. To be named Saral Pension, preceded by the company’s name, all life insurers will have to mandatorily offer this product.
It is the latest in the string of policies with uniform features across insurers that the Insurance Regulatory and Development Authority of India (IRDAI) has mandated. “Such a standard product will make it easier for the customers to make an informed choice, enhance the trust between Insurers and the insured, and reduce mis-selling as well as potential disputes,” the insurance regulator said.
What’s on offer
Immediately annuity plans are primarily targeted at retirees looking to invest their accumulated corpus. To buy such plans, you have to invest a lump-sum – termed purchase price – from the life insurer who will in turn offer regular pension payouts throughout your lifetime.
Saral Pension, a single premium, non-linked, non-participating plan, will come with just two annuity options, unlike over seven that some life insurers offer. The first one is life annuity with 100 percent Return of Purchase Price variant. Under this option, regular pension – monthly, quarterly, half-yearly or annually, as per policyholder’s choice – will be paid for life. After the annuitant’s death, the purchase price – that is, the initial investment amount – will be handed out to the nominees or legal heirs.
The second is a joint life variant, named ‘Joint Life Last Survivor Annuity with Return of 100 percent of Purchase Price on death of the last survivor’. Here, the annuity will be paid to the surviving spouse after the primary annuitant’s death. The purchase price will be paid out to the nominees or legal heirs after the surviving spouse’s death.
The minimum annuity will be Rs 1,000 per month, Rs 3,000 per quarter, Rs 6,000 every six months and Rs 12,000 per annum. There is no maximum cap. The minimum age at entry is 40 years, while the upper age limit is 80 years. The pricing – or annuity rate/return on the amount invested – will be determined by the insurers. However, the rates will be linked to purchase price bands – less than Rs 2 lakh, Rs 2-5 lakh, Rs 5-10 lakh, Rs 10-25 lakh and Rs 25 lakh and above.
Flexibility on surrender, loans a plus
If you, your spouse or children were to be diagnosed with critical illnesses such as cancer, cardiac arrest and kidney failure, you can surrender the plan. The insurer will pay 95 percent of the purchase price back to you. However, this can be done only six months after the date of inception. “These flexibilities will help meet liquidity needs of annuitants. Many annuity plans do not have such an option of surrendering during emergencies. Even plans that do offer such options do not pay back more than 70-75 percent, whereas it is 95 percent in the case of the standard plan,” says Vivek Jain, Head, Investments, Policybazaar.com.
You also have the option of availing a loan after six months from policy commencement. The interest on loan will be the 10-year G-Sec rate per annum as on April 1 of the relevant financial year, plus up to 200 basis points. “Again, most annuity plans do not have this option, which can be useful during emergencies. The cap on maximum rate that can be charged is also beneficial,” adds Jain.
A standard immediate annuity product mandated by IRDAI is likely to carry high utility value. This is because annuity products offered by insurers currently are not well understood and come with multiple pension payout options. A standard product with just two annuity payout options will make it simpler for policyholders to evaluate and buy these products. However, the tax treatment of annuity income remains a key obstacle in popularising these pension-for-life products. Annuity income taxed as per the slab rate applicable, making it unattractive for retirees
. Things could change in favour of annuity plans, however, if Finance Minister Nirmala Sitharaman decides to provide this exemption in Union Budget