Insurance firms pension plans
From Indiapensions
Insurance firms in India typically sell two types of pension plans:
- Unit linked pension plans
- Annuities
| Table of contents |
Unit linked pension plans
Unit linked pension plans are fund management products sold by the insurance firms. These schemes typically provide the investor with a choice of funds for investment in accordance with the policyholders' risk appetite.
Premiums
An individual needs to pay the premium to be eligible to avail the benefits of a Unit linked pension plan. The premium is the amount that is paid regularly, throughout the term of the policy or a single premium in the initial period of the policy. In case of payment of a regular premium, the minimum amount is Rs.10,000 p.a. and in single premium it is Rs.25,000.
Investments
The premiums are invested in the units of an investment fund. This is done according to an individual's will and is based on the prevailing unit prices. There are different kinds of Investment funds like, liquid funds, secure managed funds, defensive managed funds and balanced funds. The illustration of these funds are briefly represented in the table below:
| Funds | Area to be invested in | Level of risk |
|---|---|---|
| Liquid Fund | Bank deposits and short term money market instruments | Very low level |
| Secure Managed | Government Securities and bonds issued by companies | Low level of risk, though unit price may vary |
| Defensive Managed | High quality Indian equities | Moderate level of risk. |
| Balanced Managed | High quality Indian equity and government securities and bonds | High Level of risk |
The investment in the aforementioned areas is portable, that is, an individual can switch his existing investments from one to the another unit linked pension plan.
Benefits
The benefits available to the members are pension benefits and cash lump sum benefit. The maximum limit for any cash lump sum is one third of the unitised fund value standing to the credit of a member. The rest of the amount is used to provide an annuity. These benefits are paid in cheque. In case of the death of the member, the beneficiary receives unitised fund value plus cash lump sum of Rs.1000.
Tax benefits
The premiums offered under the plans are subject to tax benefit under Section 80ccc of the Income Tax Act, 1961. At the time of vesting, the lumpsum (1/3rd of accumulation) is tax free, whereas the annuity is treated as income and taxed accordingly.
Charges
For every premium that is paid, a percentage from that is invested in buying units. This is called Investment Content rate. There is also the charge for fund management which is included in the unit price each day. Changes can be made to these charges only after getting approval from the Insurance Regulatory and Development Authority. However, the maximum limit on the fund management charge is 2% per annum.
Annuities
The annuity market in India is very small. Most insurance companies in India sell deferred annuities. The only company to sell an immediate annuity is the Life Insurance Corporation of India (LIC), the biggest public sector insurance company in India. Typically, the following options are available to the customers of annuity products:
- Life annuity
- Joint life annuity
- Annuity for certain (5/10/15) years
- Annuity with return of capital on death.
At the time of vesting, only 1/3 of the accumulated balance can be withdrawn as a lumpsum, whereas 2/3rd of the balance has to be necessarily annuitised. All the insurance companies offer a free market option. As per this option, at the time of vesting, the customer can buy an immediate annuity from any service provider and is not bound to the insurance company from where he bought the deferred policy.
The following table shows the policies sold by the Life Insurance Corporation:
| Year | New business | Business in force |
|---|---|---|
| 1993 | 0.15 | 5.06 |
| 1994 | 0.09 | 4.65 |
| 1995 | 0.11 | 4.61 |
| 1996 | 0.11 | 4.58 |
| 1997 | 1.82 | 6.22 |
| 1998 | 0.66 | 6.71 |
| 1999 | 1.05 | 7.58 |
| 2000 | 2.23 | 9.59 |
| 2001 | 3.44 | 12.88 |
| 2002 | 7.76 | 20.63 |
| 2003 | 2.40 | 22.86 |
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