Pension Plans

help plan for retirement and offer the security of insurance.

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Deciding The Annuities

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Term and endowment life insurance plans offer lump sum payment of the sum Assured upon death or Maturity depending on the Policy in question. The Sum Assured in an Annuity plan is not repaid in full at maturity. Instead, the maturity sum is invested to create a fixed annuity for the Pension plan policyholder. The payment normally continues until death of the policyholder. This makes the annuity plan very essential when making retirement plans


Mr. X is 20 years old. He wants to retire at the age of 50 years. He goes in for a 30-year pension plan for sum assured worth Rs 50 lac. This duration of the policy is the vesting period and can range from 10 to 40 years.

At the age of 50, the annuity plan obtained by Mr. X will mature. He can choose to commute the policy and receive lump sum amount of Rs. 16.66 lacs (1/3rd of sum assured). The balance Rs. 33.37 lacs will be invested and Mr. X will receive a fixed annuity till his death.

If Mr. X does not withdraw any money, then the sum assured of Rs. 50 lacs plus Bonus plus guaranteed accruals will be invested and will provide a fixed annuity to Mr. X. The fixed income will be paid for a specific duration known as the annuity period. Individuals who buy the pension plan normally prefer payment of the annuity till their death.

If Mr. X manages all expenses using the annuity, then he can retire at the age of 50 years and enjoy life till his death. This is the beauty of smart retirement planning. If retirement plans work out properly, the individual can enjoy a happy and comfortable post retirement life.

One should keep the following factors in mind when Deciding The Annuities:

Your Age

Buying a pension plan when you are 60 years old will be very expensive as compared to buying these plans when you are 20 years old. Most insurers do not sell plans to individuals below 18 years and above 65 years. Start early to reduce your immediate cash outflow.

Vesting of Policy

At what age do you intend to stop working? When do you want the annuity plan to step in? The answer depends on personal variable factors affecting career, health and family. Most insurers do not allow vesting of policy before 40 years and beyond 75 years. Annuity plan duration ranges from 5 years to 35 years. Ideally, one should start retirement planning between 30-35 years.

Deferred or Immediate Pension Plan

Deferred plans help you accumulate wealth over many years. The annuity payment will be deferred from payment of premium. Paying Premium from 2012 to 2032 and receiving annuity from 2033 is an example of a deferred premium plan.

Immediate pension plan involves payment of a single lump sum premium which will be used to generate immediate returns. Money received from PF, gratuity and other retirement benefits can be invested lump sum in an immediate pension plan where the annuity payment shall start without any delays.

Mode of Payment of Annuity

Unlike traditional life insurance, the annuity plan offers many choices to the person receiving the payment. Some annuity payment options commonly offered by retirement plans include:

  • Till death of policyholder.
  • For a specific period like 5, 10, 15 or 20 years.
  • For a specific period. If the Policyholder survives, then annuity continues till death.
  • Till death of policyholder. Upon death, purchase price (sum assured, bonus and guaranteed additions less commuted value) is paid in lump sum to survivors.
  • Till death of policyholder with a 3% annual increase in annuity sum to provide for inflation.
  • Till death of policyholder. After death, 50%-100% of annuity amount is paid to spouse till death of spouse.
  • Till death of policy holder. After death, 50%-100% of annuity amount is paid to spouse till death of spouse. After death of last survivor, purchase price is returned.

Death Benefit and Other Riders

Not all insurers offer Death Benefit with the pension plan. This becomes risky because there is no cover for the policyholder if he or she dies before vesting of the policy. A portion of the premium paid can be set aside for death benefit and other Riders like

Critical illness, and
Accidental death and disability.

No Surrender Value

This is an important point. These policies do not have any surrender value. The money paid will be lost if the policy is not kept up to date till maturity. One should use premium Waiver options and accept a reduced annuity instead of letting the life insurance policy Lapse due to nonpayment of the premium.