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Home > Business > Special


How insurance helps you retire happily

March 30, 2006

Life insurance plans form an essential part of any financial planning exercise. The same holds true while planning for retirement. The good news is that there are various insurance policies that help individuals plan for retirement.

This article explains how individuals, with the help of life insurance, can prepare themselves for the golden years of life.

Simply put, the purpose of life insurance is to indemnify the nominees/dependants of the insured against an eventuality. There are two kinds of insurance plans, which fulfil this purpose i.e. savings-based plans (endowment/endowment type plans/ULIPs) and term plans. Let us begin with term plans and the role they play in the retirement planning exercise.

Term plans

A term plan is what is generally termed as 'pure risk insurance'. In such plans there is no savings component, and hence they are very affordable (a 30 yr old healthy male could get a Rs 10 lakh (Rs 1 million) cover for 30 years for just Rs 4,000 p.a!).

The benefits accrue to the nominee in case of an eventuality to the policyholder. Naturally, there are no maturity benefits in case the insured survives the tenure.

Term plans: High on value, low on cost!

Tenure (Years)

HDFC Standard Life (Term Assurance)

ICICI Prudential (Life Guard)

LIC (Anmol Jeevan I)

SBI Life (Shield)

Kotak Mahindra Old Mutual (Preferred Term plan)

Tenure

20

25

30

20

25

30

20

25

30

20

25

30

20

25

30

Age 25

Rs 2720

Rs 2770

Rs 2820

Rs 2933

Rs 2933

Rs 3064

Rs 2544

Rs 2861

NA

Rs 1954

Rs 2180

NA

Rs 2424

Rs 2535

Rs 2755

Age 35

Rs 3580

Rs 4120

Rs 4750

Rs 3798

Rs 4067

4564

Rs 4613

Rs 5534

NA

Rs 3542

Rs 4375

NA

Rs 3747

Rs 4188

Rs 4739

Age 45

Rs 7620

NA

NA

Rs 8258

NA

NA

NA

NA

NA

Rs 8354

NA

NA

Rs 7797

Rs 8970

NA

The premiums given in the table are for a sum assured of Rs 1,000,000 for a healthy, non-smoking male. Taxes as applicable may be levied on some premium quotes given above. The premium quotes given above are only indicative. Individuals are advised to contact the insurance companies for further details. Source: Persoanlfn Research

A term plan plays an essential part in retirement planning. It helps the individual to focus on the retirement planning exercise without having to worry about the 'financial condition' of his nominees/dependants in his absence. It does this by providing for a large sum assured at a lower cost, which can help take care of finances in the absence of the breadwinner.

One can also opt for add-on riders with the basic term plan policy. A term plan is particularly useful in case the individual has bought a pension plan from a life insurance company 'without life cover'.

Ideally, a term plan should be bought by an individual for the maximum tenure available. The maximum tenure available as well as the premium charged differs across insurance companies. Individuals would do well to check these aspects before finalising on such plans.

The earlier a term plan is bought, the cheaper it turns out to be. Having said that, it is never too late to buy a term plan.

Savings-based plans

These plans differ from term insurance in one primary aspect - they also provide for a maturity amount if the individual survives the tenure of the plan. That is because the premiums charged by such plans also include a savings element. The savings portion is invested by the life insurance company to generate returns, which the individual receives on maturity.

Savings-based insurance plans play an important role in the retirement planning exercise. They help individuals build a corpus for retirement.

This becomes necessary keeping in mind that individuals would have stopped working at that age and a regular income stream like salary won't be available. On the other hand, the retiree will continue to incur regular expenses.

Other important factors like inflation and higher medical expenses would also have to be factored into the equation.

Various kinds of insurance plans are available to help individuals build a nest egg for retirement. Pension plans and regular endowment plans fall in this category. Let us take a look at regular endowment plans (pension plans have been dealt with separately in this guide). An illustration will help in understanding this point.

Endowment plan table

Age (Yrs)

Sum Assured (Rs)

Annual Premium (Rs)

Tenure (Yrs)

Maturity amount (Rs)

6%

10%

Company A

30

500,000

12,500

30

791,000

1,610,000

Company B

30

500,000

14,000

30

960,000

1,590,000

The figures given above are indicative. They will vary across life insurance companies.

Suppose an individual aged 30 years, insures himself for a sum of Rs 500,000 for a 30-year tenure. As can be seen from the table, the premium he will pay for the same is about Rs 12,500. In case of an eventuality, the nominees will get the sum assured i.e. Rs 500,000 plus the additions/bonuses (if any) till date.

In case the individual survives the tenure, he stands to get Rs 791,000 (calculated @ 6% compounded annual growth rate- CAGR) Rs 1,610,000 (calculated @10% CAGR) on maturity.

However, it must be understood that the return figures are really not as impressive as they are made out to be. Returns are not calculated on the actual premium paid. Instead, they are computed on the premium after deducting expenses.

In the illustration (refer Table 2), the actual return on premium works out to approximately 4.45% CAGR (for the 6% return figure) and 6.26% (for the 10% figure) respectively.

The figures will differ across insurance companies. Individuals need to evaluate their options before they finalise on an insurance company.

For example, as is apparent from Table 2, in case of Company B, the actual return is different as compared to Company A (4.91% CAGR for the 6% return calculations and 7.61% CAGR for the 10% return calculations respectively). The return declared by a life insurance company depends on how well it manages its finances and controls expenses.

Conventional endowment plans invest premiums in bonds and government securities which is why the returns are so subdued. This is where unit linked insurance plans (ULIPs) can help.

The primary difference between ULIPs and traditional endowment plans is their investment mandate and flexibility. ULIPs have a mandate to invest premiums (upto 100%) in varying proportions in equities or in debt. Individuals also have the freedom to shift their monies from equity to debt and vice-versa in varying proportions.

We believe that ULIPs (powered by equities) are equipped to offer better returns over the long term. And since retirement planning is a long-term activity, investing in ULIPs would hold individuals in good stead.

However, individuals should note that investments in ULIPs should be in line with their risk profile and their overall asset allocation.

Clearly, life insurance is an important tool for any individual planning for retirement. However, as we have highlighted, this exercise must be conducted after assessing one's investment objective and needs. This will ensure you are not caught wrong-footed in your golden years.

For a Free download of the latest issue of Money Simplified - Retirement Planning & YOU, click here!

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