Looking for a standard annuity plan? Check out Saral Pension

The Insurance Regulatory and Development Authority of India (Irdai) has directed all life insurance companies to mandatorily offer a standard individual immediate annuity product by 1 April 2021. This will be a single premium, non-linked non-participating immediate annuity plan. In its simplest form, annuity means that you pay a lumpsum as purchase price and get a fixed payment at regular intervals for the rest of your life. For example, you might pay ₹1 lakh upfront and receive ₹3,000 per year as income for life. There are many variants of annuity and Irdai has adopted two of them in the Saral Pension as noted below.

This will be a standard immediate annuity plan for individuals; it will provide a minimum annuity of ₹1,000 per month, ₹3,000 per quarter, ₹6,000 per half year and ₹12,000 per annum. There is no limit for taking the maximum annuity, as this will depend on the maximum purchase price.

As per Irdai guidelines issued on 25 January, the standard individual immediate annuity plan will be called ‘Saral Pension’ prefixed by the insurer’s name.

Sanjay Tiwari, director (strategy), Exide Life Insurance, said that the minimum entry age for this plan is 40 years. “The exit age is not applicable as this is a whole life product, which means the annuitants will receive benefits till they are alive," he said.

Here’s a look at the key features:

ANNUITY OPTIONS

a) Life annuity with 100% return of purchase price: Under this option, the annuity is paid for the life of the annuitant. Besides, 100% purchase price will be returned to the nominee/legal heirs on the annuitant’s death.

b) Joint life annuity with a certain provision: As per the plan, a joint-life annuity can be provided by the insurer with a provision of 100% annuity to the secondary annuitant on the death of the primary annuitant and return of 100% purchase price on death of the last survivor.

In this case, the annuity is first paid to the annuitant for life. After the death of the annuitant, if the spouse is surviving, the spouse continues to receive the same amount of annuity for life till his/her death. Subsequently, on the death of the spouse, the purchase price shall be payable to nominee/legal heirs.

PAYMENT MODES

The annuity will be paid on a monthly, quarterly, half-yearly and yearly basis. As per Irdai, “The payments will be in arrears only, which means that the first annuity payment will start after the modal duration; for example, after three months in case of quarterly mode. Modal factors to be derived with an interest rate consistent with pricing rate of interest."

BENEFIT PAYMENTS

1. Death: In the case of a single life annuity, 100% of the purchase price will be paid.

However, in the case of a joint-life annuity, after the death of the annuitant, the annuity can be paid in the following ways:

a) If the spouse is surviving, the spouse continues to receive the same amount of annuity for life till his/her death. Subsequently, on the death of the spouse, 100% purchase price shall be payable to nominee/legal heirs.

b) However, if the spouse has pre-deceased the annuitant, then on the death of the annuitant, the purchase price shall be payable to the nominee /legal heirs.

2. Survival: An annuity is payable during the survival of the annuitant.

3. Maturity: There is no maturity benefit under the product.

4. Surrender on the diagnosis of critical illness of the annuitants: The policy can be surrendered any time after six months from the date of commencement, if the annuitant or the spouse or any of the children of the annuitant is diagnosed as suffering from any of the critical illnesses specified in the policy document, based on the documents produced to the satisfaction of the medical examiner of the insurer.

The list of critical illnesses may be revised from time to time by the Irdai as needed. As per the guidelines, on approval of surrender, 95% of the purchase price will be paid to the annuitant, subject to deduction of outstanding loan amount and loan interest, if any. Once the payment of surrender value is made, the policy gets terminated.

POLICY PRICING

As per Irdai, the pricing is left to the insurers. However, annuity rates will have to be derived based on actuarial principles to ensure that such annuity rates are fair and reasonable to customers.

“Good and services tax (GST) would be similar to existing rates," said Vivek Jain, head of investments, Policybazaar.com.

Tiwari added, “GST applies to the purchase price or premium price of annuity products. Currently, the rate of GST is 1.8% on the purchase price. For instance, if the purchase price of the annuity plan is ₹50 lakh, the GST @1.8% will be ₹90,000. So, the premium payable will be ₹50,90,000."

LOAN FACILITY

The loan can be availed by the annuitant any time after six months from the date of commencement of the policy. The interest on the loan will be at 10-year G-Sec rate per annum as on 1 April, of the relevant financial year, as published by the Financial Benchmarks India Pvt. Ltd, plus not more than 200 basis points and shall be applicable for all loans granted during the period of 12 months, beginning 1 May of the relevant financial year.

SHOULD YOU BUY?

An annuity helps you meet expenses incurred in retirement. You may be planning for a source of income when you retire from work life and an annuity plan can be one of the simplest and safest ways to secure that future source of income.

However, Col. (retd) Sanjeev Govila, a Sebi-registered investment adviser, said that for the customers who wanted such a product, it was very difficult to make a choice easily. Each and every immediate annuity product currently in the market has its own variations. What mental weightage to give each feature is not easy for a common man. “By standardizing all the features of all such policies, it simply comes down to the cost of offering and the comfort level of the purchaser with the insurance firm," he said.

Tiwari added, “People always look for ease of purchase and simple and easy to understand terms and conditions before buying any financial product. All these requirements are addressed by the Saral Pension product."

However, note that GST of 1.8% on the purchase price can make this less competitive than annuities under the National Pension System, which do not attract GST.

Source: Live Mint