What is an ideal retirement investment plan?6 min read . Updated: 30 Oct 2020, 08:53 AM IST
An ideal retirement policy is one wherein an individual start saving during the accumulation phase, which is typically in the age of 30-35 years and should invest for over a period of 25-30 years.
'Retirement planning' and 'saving for child's future' are the two most important goals. Both are long term goals and one has a lot of time to plan and save towards these goals , despite that sometimes people face difficulties and they have to opt for alternative ways like taking credit for child's higher education or marriage. We spoke to Kamlesh Rao, MD & CEO, Aditya Birla Sun Life Insurance to guide us through the ideal investment for these goals to avoid any discomfort when these goals mature. "The ideal retirement policy is a solution that offers regular source of income even after retirement. Therefore, to select the right kind of plan, it is important to first assess basic living expenses each month post-retirement, take inflation into account, healthcare and recreation costs; all must be considered very wisely," says Kamlesh Rao.
Rao also discusses the importance of insurance to overcome unforeseen expenses during covid 19, kind of returns one can expect from savings cum insurance products and why a child plan offered by insurance companies is unique.
The first thing first, COVID 19 has changed the way people looked at insurance. Is it true? How life insurance can help people during Covid times?
The pandemic has changed life’s journey into various degrees of uncertainties leading to increased risk awareness and risk aversion amongst people. Today, there is a flight to safety and individuals want to secure their life and money both. Life insurance has today emerged as the fall back option, offering a sense of security to many individuals. All life insurance solutions also offer coverage against eventualities caused due to COVID which is an added relief for policyholders. This has led to a change in the trend and has increased the importance of life insurance in people’s mind. Investment patterns have changed and there is an increased demand for protection as well as guaranteed products. The life insurance industry has witnessed an upper trajectory with regards to protection plans, policies offering financial security while enhancing liquidity provisioning. Besides opting for fresh policies, people have become increasingly conscious about staying protected at all times. Individuals have renewed existing policies which is reflected in the increasing persistency even during such tough times.
Do people still come to you with an expectation of returns from insurance? What is your advise to them?
The current circumstances have brought in ample awareness and a flight to safety, leading to the increased purchase of pure protection plans or term plans. However, the demand of a living benefit certainly exists, which is evident from the fact that a large chunk of the term plan is also sold with a return of premium option. Alongside, there exists a market for guarantee and other saving products, as people have now realized that to save for eventualities is of utmost importance.
I believe that people should first evaluate the risk that they want to cover and opt for a plan accordingly. In case they are looking at a plan which will act as an income replacement tool, only in the event of an eventuality, they should opt for a pure Term plan. Such plans are relatively cost effective than other plans and offer higher sum assured. In case, an individual is expecting return from insurance, plans which offer guaranteed returns are appropriate for them. One must always remember that insurance policies must be purchased as per one’s financial requirement and risk planning, there is no one insurance that can serve all.
We often hear investment planners advising people to keep insurance and investment separate. Then what about savings and investments products offered by insurance companies? What is your view on this?
It is important to note that both pure protection life insurance covers and policies offering savings cum investment are important for individuals and have their own place. While, the former caters to life’s protection needs, the later secures the financial needs of an individual. Both these plans are different but equally important. When it comes to savings cum investment solutions offered by life insurers, they help customers create desired savings for long-term. In case an individual is looking to save and grow their money to achieve a long-term goal, saving and investment products offered by life insurance companies are a great option. These products offer completely tax free returns and the costs are extremely competitive when looked at from a long-term financial investment point of view. Additionally, these costs also cover mortality and offer an additional benefit of life cover which is anywhere between 10-20 times or more of the sum assured. So, if individuals are looking for pure life protection or life cover, they should look at insurance for sure. Additionally, if someone is looking for a savings plan, for a longer-term, in that scenario an insurance savings plan becomes highly comparable to any other financial instrument opted for a long-term benefit.
What kind of returns should a person expect from savings cum investment products offered by insurance companies?
Life insurance companies offer saving cum investment solutions, where the returns are either based on market performance or are guaranteed. A market-linked life insurance plan like ULIP offers return which depend on market performance. However, there are traditional life insurance plans that offer a consistent and guaranteed return, as most of the money is invested in debt and safe financial instruments, like AAA bonds, infrastructure bonds etc. Such policies are usually for a longer tenure and offer a guaranteed yield of over 5.25% - 6% which is also completely tax-free resulting in a higher net return to the customers. These returns are very competitive when compared with other long-term financial instruments.
What is your view on plans designed for children? Do you believe those plans are actually needed? What is the suitability of such insurance schemes?
Building and sustaining wealth corpus for child’s important milestones has always been the topmost priority for every parent. A child insurance plan is a distinctive product which aims at offering desired pay-outs combined with the shield of protection, to suit the financial goals of parents and create a defined corpus to financially secure child’s future milestones. Any investment that one makes for his/her child holds good until the parent is surviving. No other financial instrument, but life insurance, ensures that the savings continue if anything unfortunate happens to the premium paying parent. All child insurance plans have the in-built Waiver of Premium element that ensures that the policy continues even in the case of an exigency and the future of a child stays financially secured. In case something happens to the premium paying parent, all future premiums are waived off, while the pay-outs are done as per the desired milestones of the child. Such offerings make a child insurance plan unique and a must have for every parent, especially in these uncertain times.
What is an ideal retirement policy?
The ideal retirement policy is a solution that offers regular source of income even after retirement. Therefore, to select the right kind of plan, it is important to first assess basic living expenses each month post-retirement, take inflation into account, healthcare and recreation costs; all must be considered very wisely. Retirement is about two phases – the accumulation phase and the income phase. Accumulation phase is wherein an individual builds corpus to get a recurring income post retirement, to maintain a desired standard of living. In the income phase, a lump sum amount gathered during the accumulation period is used to purchase an annuity, which offers life-long income for an individual and spouse. An ideal retirement policy is one wherein an individual start saving during the accumulation phase, which is typically in the age of 30-35 years and should invest for over a period of 25-30 years. On turning 60, which is typically known as the vesting age, one can thereafter use the corpus to purchase an immediate annuity plan which will offer income for life, for self and spouse. It will also offer the facility to pass on all the money invested in the annuity plan, as a legacy to one’s kids.