The insurance business in India isn’t just growing, but is also becoming more sophisticated in terms of product offerings. To help readers keep ahead of developments in this business,Mint features a Q&A on insurance every Monday.
I am 38-year-old person working as a senior manager in a multinational software firm. A few agents from different companies have approached me regarding pension plans. I want to know how pension plans work, and how do I go about purchasing one?
Pension plans are specifically designed to help one save and build a retirement kitty by investing money on a regular basis. Once the retirement age is attained, pension plans offer you the benefit of converting your retirement kitty into an annuity. These pension plans are also known as deferred annuity products.
Pension plans are eligible for tax deduction under Section 80C. Also, on attaining retirement it is mandatory to convert two-thirds of the retirement kitty into an annuity.
While evaluating purchase of a pension plan, it is advisable to undergo a detailed financial planning exercise with your agent or a financial planner, so that you can assess the target sum of money that would be required to fund your post-retirement years.
The key factors that would determine this target sum are: your expected expenses post-retirement, expected retirement age, and inflation.
After having completed this exercise, you can choose from various plans available, depending upon your targeted regular investments, charges of the various products and the features offered by various pension products. At your present age, and assuming that you shall actively work for another 15-20 years, a unit-linked pension plan might be suitable for you, as it would provide you the opportunity to earn potentially superior returns on your investments. However, you must only decide after having assessed your risk-return profile.
What are the tax implications of purchasing unit-linked single premium plans?
Life insurance products are normally subject to two key tax laws: Section 80C and Section 10(10(D)). While Section 80C is related to the tax exemptions on the premium paid, Section 10(10D) deals with the taxability of the maturity/surrender proceeds from an insurance policy.
As per the existing tax laws, the Section 80C benefit is available for the premium amounts for which the sum assured is at least five times the premium paid. For example, if the premium is Rs50,000, then to avail of the Section 80C benefit on the entire Rs50,000, the sum assured should be at least Rs2.5 lakh. The maximum eligible amount for Section 80C benefit, for all eligible instruments, is Rs1 lakh. For the Section 10(10(D)) benefit, the same rule applies, that is, the maturity or surrender benefit is tax-free only if the sum assured in every year of the policy is at least five times the premium paid. However, you should take a decision after consulting your tax experts on the exact product that you plan to purchase.
What is the importance of guarantees in a child plan which I am evaluating?
Planning for your child’s future is all about ensuring that the future of the child is not affected by any unfortunate event in your life in the future. You should ensure that the plan you purchase provides guarantees for the “if” of life, especially when it comes to planning for your child’s future. However, you must analyse the types of guarantees available, return on your investments, and the premiums to be paid for the policy, before you make a final decision.
Readers are welcome to write in with their queries to email@example.com. The questions will be answered by senior executives from leading insurance firms.
This week’s expert is Rajesh Relan, managing director, MetLife.