LIC Pension Plus unit-linked plan review

Tuesday, April 5, 2011, 9:14 by Business Editor

Life Insurance Corporation’s ‘Pension Plus’ plan offers a stable monthly source of income post-retirement.

You are in your early 40s, already have some sort of life insurance cover, and want to start building a nest egg for your retirement years. Quite rightly, so. And the daily gyrations of the stock markets–or the opacity of the real estate sector, for that matter–are not exactly your cup of tea, in terms of getting actively involved in these assets.

Yet, we believe, you are keen on getting some exposure to the Indian financial markets (read, stocks, bonds, etc.) in order to create some wealth over the next 15-20 years–the end goal being to have some sort of a stable monthly source of income post-retirement.

Well, Life Insurance Corporation’s ‘Pension Plus’ plan is an option you might consider. Launched last September, this unit-linked pension plan is targeted at individuals having a relatively lower risk appetite, who seek to invest funds for their retirement and intend to purchase annuity (read, pension) on maturity or withdrawal of the policy. Also read our detailed story on top pension plans in India

After you select the type of Investment Funds (more on that in a while), LIC will invest your premiums–net of applicable charges–into that Fund, by purchasing so-called “Units” of that Fund. These Units will be allotted, depending upon the Net Asset Value of the given Fund as on the date of allocation. Keep in mind the fact that the risks pertaining to such investments solely lie with you, and not LIC.

Key characteristics of LIC Pension Plus

1.      Minimum guarantee: The USP of this scheme is that it offers the policyholder a minimum guarantee on the gross premiums paid by him. Basically, one is assured of a minimum level of return on investments when the policy matures (i.e. the policy term ends).

This provision, incorporated by LIC in accordance with new guidelines enacted by the industry regulator IRDA, is aimed at shielding policyholders (typically senior citizens) from market volatility.

2.      Death Benefit: Don’t expect any life cover under the ‘Pension Plus’ plan, which doesn’t promise any Sum Assured, i.e. LIC won’t cover the policyholder for mortality risk (death).

In the event of the policy owner’s death during the course of the scheme, his nominee will be awarded the accumulated fund, or the Fund Value, only.

The beneficiary can choose to encash this amount either as a lump-sum figure or as an annuity (a fixed amount, say Rs.2,000, per month throughout the year).

Subject to the payable lump-sum amount and the then prevailing immediate annuity rates (as set by IRDA), the company will decide the annuity–based on the annuity option selected.

3.      Maturity benefit: When the policy matures/vests, LIC will use the higher of policy owner’s Fund Value and Guaranteed Maturity Proceeds to give him an annuity, depending on the then prevailing annuity rates.

However, the policyholder is allowed to commute (withdraw) as much as 33% of the Maturity Benefit as a lump-sum figure.

He also has the option of deciding to buy annuity from LIC or any other life insurer.

4.      Investment Funds: The ‘Pension Plus’ scheme, being a unit-linked product, invests your premiums–net of applicable charges–in one of the following two investment funds.

Fund name Asset classes invested in (as a % of overall fund portfolio)
Government / Government Guaranteed Securities / Corporate Debt Short-term investments (e.g. money market instruments) Listed equities/stocks
Debt Fund >=60% <=40% Nil
Mixed Fund >=45% <=40% 15-35%

5. Payment of Premiums: This annuity plan allows you to make premium contributions at annual, half-yearly, quarterly or monthly frequencies over the duration of the policy. But if you want to pay everything in one shot, then a single-premium option is there as well.

6.      Top-up premium: One can pay extra premiums, on top of this base plan, for investment purposes.

7.     Surrender: After the lock-in period of five years, if the policyholder wants to surrender the policy, i.e. redeem/withdraw his invested premium, then he can only get back one-third of his total money as a lump-sum. He has to purchase annuity for the remaining two-third of the accumulated corpus.

Here are some basic details of the plan –

Policy at a glance Regular-premium pay Single-premium pay
Premium payment frequency Annual, half-yearly, quarterly or monthly Only when buying the policy
Entry Age (minimum – maximum) 18-75 years
Maturity Age (minimum – maximum) 40-85 years
Policy Term 10-20 years
Minimum Premium (in Rs.) 15,000 per annum for non-monthly mode 1,500 per month for monthly mode 30,000
Maximum Premium (in Rs.) 1,00,000 per annum No limit
Sum Assured (in Rs.) Nil

Benefit illustration for a 30-year-old healthy male

For Regular Pay

Entry Age 30 years
Policy Term 20 years
Premium Payment Term 20 years
Premium payment frequency Annual
Annual Premium (in Rs.) 25,000
Sum Assured (in Rs.) Nil
Investment Fund chosen Debt Fund
Fund Value at Maturity (in Rs.) 8,24,315 (assuming a Gross Yield of 6%); effectively  a rate of return of 4.8% 13,16,446 (assuming a Gross Yield of 10%); effectively  a rate of return of 8.8%
Death Benefit during the 1st year of the policy 24,111 (assuming a Gross Yield of 6%) 25,028 (assuming a Gross Yield of 10%)
Death Benefit during the 10th year of the policy 3,12,254 (assuming a Gross Yield of 6%) 3,90,331 (assuming a Gross Yield of 10%)
Death Benefit during the 20th year of the policy 8,24,315 (assuming a Gross Yield of 6%) 13,16,446 (assuming a Gross Yield of 10%)

For Single-premium pay

Entry Age 30 years
Policy Term 20 years
Premium Payment Term 1 year
Premium payment frequency Single-premium pay
Annual Premium (in Rs.) 50,000
Sum Assured (in Rs.) Nil
Funds opted for Debt Fund
Fund Value at Maturity (in Rs.) 1,20,586  (assuming a Gross Yield of 6%); effectively a rate of return of 4.8% 2,51,072 (assuming a Gross Yield of 10%); effectively a rate of return of 8.8%

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