Pros and Cons for using insurance for Retirement
Pros and Cons for using insurance for Retirement
Retirement planning
Retirement planning is the important task of deciding how you will live once you retire. It involves the consideration of a number of factors .A few are mentioned below
- At what age you plan to retire.
- How much money you will need to cover living expenses.
- The things you plan to do once you have retired.
- Where your money will come from.
Types of insurance policies available for retirement
1.Ulips Geared for Old-age Cover
These are single premium plans, that is, you have to pay premium just once, at the beginning of the plan. Most Ulip retirement plans invest only a small amount in equity-based funds to avoid risk and secure capital.
2.Traditional Retirement Plans
Maturity benefits in traditional plans are based on the sum assured. At maturity, a buyer of a participating plan gets sum assured along with guaranteed additions, if any, and bonuses.
Retirement Income plan provides sum assured or accumulated amount, whichever is higher. The returns include guaranteed loyalty additions and bonuses.
Retirement plans are designed to provide returns only at the age you require them the most, that is, the vesting age, which is the age when you start getting payouts.
Traditional retirement plans provide life cover during the accumulation phase. Different plans offer this benefit in different forms.
3.Other endowment plans
These can also be used for retirement planning, but their returns are low.
A lot of investors think that retirement pension plans are the only way to go; and if they do not invest in these products today, then they will miss out on something. But this should not be the case.
Four strong reasons why you should avoid buying insurance plans for retirement in India
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There are better options for growth of your wealth
The accumulation of your wealth happens in a pension plan for many years, but it’s not the best way your money can grow. Ultimately if you had to invest your money in equity you have simple and no-cost options like mutual funds, index funds. Also you can choose to put money in real estate. A regular SIP in an equity diversified mutual funds should give much better returns then accumulation in a pension plan (read unit linked products).
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No predictable returns for annuity
A lot of pension products do not give a clear idea on how much will you get at the end. What if the return earned is a mere 4 percent. No point in investing in annuity then, where returns are lower than inflation itself!
- Rigidness and no flexibilityAlmost all the pension products are rigid in taxation and what can you do with your money at the end. Under current laws you can withdraw only 1/3rd of the accumulated money tax-free.
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High charges
ULIP’s and other similar products have charged so high costs for initial years without giving clarity to customers. These annuity plans also have high allocation charges many times and customers do not know about it and cannot do much later when they come to know of it. So better not to pay high fees for these products.
It is suggested that you invest in some instrument which does not have any rigidness on what can be done with your investments at some later stage like EPF, PPF, Superannuation, VPF, NPS which offer more returns, flexibility, tax benefits than insurance plans.
Some better retirement Planning Options are discussed below
National Pension Scheme (NPS)
NPS is transparent and cost effective system wherein the pension contributions are invested in the pension fund schemes and the employee will be able to know the value of the investment on day to day basis.
All the subscriber has to do, is to open an account with the nodal office and get a Permanent Retirement Account Number (PRAN).
Each employee is identified by a unique number and has a separate PRAN which is portable i.e., will remain same even if an employee gets transferred to any other office.
NPS is regulated by Pension Fund Regulatory and Development Authority-with transparent investment norms & regular monitoring and performance review of fund managers.
Public Provident Fund (PPF)
If you are looking for an affordable and attractive small saving scheme, Public Provident Fund (PPF) could be a great option to think about. The scheme was launched by Central Government in 1968 and since then has been quite a popular mode of investment and tax saving. The interest earned is totally exempt from income tax under section 88 of the Income Tax Act. The outstanding PPF amount for customers is also fully exempt from wealth tax payment. These tax benefits make PPF saving scheme one of the most lucrative savings tool.
Employee Provident Fund (EPF)
Employee Provident Fund is a very important tool of retirement planning. The tax free interest (compounding) and the maturity ensures a good growth of your money. If continued for a very long term, it can help immensely in meeting retirement goal. PF Entitles for Pension
The pension on retirement is linked to the number of years in service and the average salary drawn in the year before retirement. This contribution in EPS helps in building a corpus for your pension. Although the maximum pension has been limited to Rs 3500 p.m., it is possible to get a higher pension if employer contributes on basis of employee actual pay and not.
Superannuation
Superannuation savings are one of the most effective ways of saving for the long term. It is a contribution made by employer each year on your benefit towards the group superannuation policy held by the employer. It is an importat part of creating wealth for your retirement. Normally the interest rate is equivalent to the PF interest rate.
Voluntary Provident Fund (VPF)
Voluntary Provident Fund is a version of the traditional provident fund saving scheme where in you retain the control to periodically assign a specific amount to the provident fund, voluntarily, as part of your VPF contribution. Voluntary PF will help you amass a sizable savings portfolio and provide a long term savings option for those big life milestones plus retirement.
Direct equity or mutual fund investments
These can also be used to create long-term capital, but prudence will have to be used, as such products do not have any fixed time horizon and maturity value. You will have to time the market correctly to maximise benefits. Fund houses are coming up with options for retirement with fixed lock-in periods.
Investing in the above products give more returns in the long run and offer more flexibility than a retirement insurance plan. And given the high costs in today’s time it will definitely be prudent to invest in those products.
We hope we have answered your queries on why planning for retirement at an early stage is beneficial for you. If you still have any unanswered questions or need help, feel free to contact us.
We would be glad to help you with your planning and investment related decisions.
Debalina Roy Chowdhury
Para Planner
Dilzer Consultants
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