Endowment policies are not ideal retirement vehicles due to their low sum assured, high premiums and stringent surrender charges.
After a hiatus, insurance companies are once again launching deferred annuity products. Only this time, traditional endowment plans are being showcased as an ideal way for you to derive a pension, after you retire.
HDFC Life Guaranteed Pension Plan is one such policy. Premiums can be paid for 5, 7 or 10 years and the total term of the policy is 10-20 years. So you can, for example, pay premiums for 7 years, while the policy period is 20 years.
Like many traditional products there are ‘guaranteed’ additions made for every complete year. There is also a vesting addition made depending on the policy term.
We have analysed its features and suggest whether you should put your money into the policy for retirement pension purposes.
SMALL GUARANTEE
HDFC Life Guaranteed Pension Plan has a rather high minimum entry age of 35 years. Given that saving for retirement should ideally begin as early on into your career as possible, this makes for a somewhat late start.
The company makes a guaranteed addition of 3 per cent of sum assured for every year the policy is in force. Also, there is a ‘vesting addition’ made which ranges from 30 per cent of sum assured for a 10-year policy to 60 per cent for a 20-year term.
So, if you take a policy for Rs 2 lakh sum assured, you will get Rs 6,000 each year as guaranteed addition. Also, if your policy is for 20 years, you will receive Rs 1.2 lakh as vesting addition at the end of the term. The corpus at the end of 20 years would thus be Rs 4.4 lakh. You will have to buy an annuity product from HDFC Life at the end of the policy term with this corpus.
The premium rates for a 35-year-old who wants a 20-year policy is Rs 221.88 per thousand sum assured for a five-year paying term. So, for a Rs 2-lakh-sum assured policy, the premium to be paid annually would be Rs 44,376. This translates into returns of around 4.5 per cent.
Surrendering the policy early may prove to be an expensive affair. For example, if you take a policy that entails paying premiums for 10 years and want to surrender at the end of the fifth year, you will get just 49.7 per cent of the premiums paid.
In case of any unfortunate event, total premiums paid till date, accumulated at a compounded annual rate of 6 per cent, is paid to your nominee.
LOW RETURNS
With low sum assured, high premium rates and stringent surrender charges, endowment policies are not the ideal vehicles for saving towards retirement goals.
Also, returns from this product is less than 5 per cent, which is too low given that inflation rate is nearly its double.
OTHER OPTIONS
If you are a very conservative investor, PPF, which is a 15-year product, is an excellent tax-efficient investment option. You can invest up to Rs 1 lakh in it.
Investing in fixed deposits, especially if you are in the 10 or 20 per cent tax bracket would generate much higher returns than this pension product too.
You can also opt for balanced schemes offered by mutual funds, which operate at low costs. These funds offer exposure to equity, which is a necessary ingredient to ride out inflation.
NPS (national pension system) is another ideal vehicle for saving towards your retirement. NPS also allows you to spread investments across equity and debt based on your risk appetite.
WHAT TO DO
The accumulation phase is the most important while planning for retirement and choosing the right avenue is critical. For, if you have a low corpus by investing in products that do not offer enough returns, it would not be enough for your post-retirement needs.
After accumulating a sufficient corpus, based on your expenses and other liabilities, you may then consider an immediate annuity product, based on the then prevailing market conditions and the rates offered.
Take a term cover for insurance purposes and invest in the above-mentioned products on a regular basis for retirement.
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