How many times have you come across bank representatives trying to sell hard their pension cum insurance products? A look at these investment options may induce you to invest in any of these to benefit from the twin options of both insurance and pension. Many insurance companies endorse these products explaining how their pension cum insurance products help to tackle the dual challenges that most people are aggrieved with. However, despite all the debates and justifications, are these products worth the buy?
Before we proceed in this direction, let us first understand what these products are. As the name suggests, these are investment options that promise the policyholders the benefit of a lifetime pension as well as a lifetime cover. Post investment,
- You pay premiums towards the policy till you retire
- You start receiving the pension amount from the cumulative retirement corpus based on the chosen annuity plan.
However, in the event of the sudden death of the insured, a lump sum amount is paid to the family members.
Are these products worth the fame?
One drawback that financial experts point out is that these plans promise an insufficient cover. This is concerning as buying insurance aims to provide maximum financial security to one’s family and loved ones. For example, the sum assured on policies with annual premiums not exceeding ₹1 lakh is not more than ₹7 lakhs. However, looking at the net financial net you would like to create for your family, you must opt for a plan that provides a minimum sum assured equal to 10-12 times your yearly pay. Also, the pension payout in these plans is much lower than in dedicated pension plans.
Mrin Agarwal, Founder, Finsafe shares, “Pension cum insurance products have high costs and, hence, low returns. Pension rates tend to be low and pension is also taxable. Investors are better off growing their investment through equities and considering other regular income options at retirement.”
Dedicated term insurance policies and pension policies enjoy an edge over these mixed investment products promising multiple benefits. If you are looking for an exclusive insurance cover, buying a term policy promising a higher and more extensive life cover in case of sudden death.
In today’s time, one must plan for a pension in a way that covers all their future expenses. This means that the pension amount must be adequate and in sync with inflation and future monetary needs. Agarwal adds, “Pension rates tend to be low and pension is also taxable. Investors are better off growing their investment through equities and considering other regular income options at retirement. Also, pension cum insurance products have high costs and hence provide low returns. If an investor wants a regular pension, a better way to invest is through the National Pension Scheme (NPS).”
Explaining why NPS scores over pension cum insurance products, Suresh Sadagopan, founder of Ladder7 Financial Advisories says, “The best option if one wants to buy a pension product is to choose NPS. It is low cost, has the option of different fund types, the added option of different fund managers, and last but not the least, the option to take out 60 per cent, without tax, when you are 60 years old.”
Are pension cum insurance products costly?
Many investors tend to ignore the cost factor owing to disinterest or lack of information regarding the same. What they fail to understand is that the premiums paid do not get fully invested in the pension product. Apart from the usual amount charged for administration and fund management, pension plan companies also levy an additional mortality charge to provide life cover. While some insurance companies redeem the mortality charges on maturity, others ignore returning the same.
The cost factor also comes into purview while discussing the liquidity of these products. These traditional plans are mostly illiquid, which means that the policyholders looking to exit before the stipulated date will be asked to high surrender charges.
An exit from NPS and unit-linked insurance plans (ULIPs) is much easier and incurs far fewer charges than these pension cum insurance products.
If you are indeed looking to financially secure your family, prefer to include a term cover in your investment portfolio that ensures you enough cover at low costs. If you are looking to secure your future through regular pension plans, then choose between NPS and retirement funds run by asset management companies that promise you good returns at nominal charges.