The insurance business in India isn’t just growing, but also becoming more sophisticated in terms of product offerings. To help readers keep ahead of developments in this business, Mint will feature a weekly Q&A on insurance.
What is the right age for one to start planning for retirement?
The key is to start early. Some key points to take into consideration when planning for retirement are: expected monthly income post-retirement; inflation; and growing medical needs. Hence, it is advisable to think about retirement in the early earning years as there is no pressure to support a family, or the burden of high medical expenses.
There is a ‘cost of delay’ in terms of increase in initial premiums required even if the pension planning is delayed by five years. For example, a 35-year-old man, with a target retirement fund of Rs50 lakh wishing to retire at 60 years, has to start investing at Rs60,408 per annum. If he delays this by five years, he will have to pay Rs98,463 per annum for the same accumulated amount of Rs50 lakh (increase of 63%), assuming the growth rate is 10%.
What is longevity risk? How do life insurers help cover this?
A person on the verge of retirement plans for 15-20 years of post-retirement income. However, this may not be enough as the person may live longer. This is called longevity risk planning. In order to have a regular income for the entire lifetime, it is advisable that one invests in a pension plan from an insurance company.
How does the ‘with-profits fund’ work? Is the risk of capital erosion protected in this fund?
The with-profits fund and the unit-linked fund are both structured around units. The with-profits fund is designed to provide the policyholder a capital guarantee on the investment portion of the premiums at the selected date of maturity. The money is invested in a range of assets, predominantly in secure, fixed-income securities that provide solid returns without undue risk.
The premiums paid by the customer are used to purchase units in the with-profits fund. At regular intervals, bonus is declared and the net asset value (NAV) increases accordingly. If the actual return is higher, it goes into profits. On maturity, 90% of the profits are returned to the policyholder. Even if the fund performance is negative in any year, policyholder money is safe. Moreover , there is also a guarantee that the NAV will never fall.
(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 isBert Paterson, managing director, Aviva Life Insurance Company India Pvt. Ltd.)