Retirees usually have to depend on their pension income to meet their regular financial expenses. A little reduction in the pension return can significantly impact the spending capacity of retirees. So, when choosing between should you buy Buy Pension Plans With Life Coverage Or Purchase Separately, one needs to be very careful. To know what the best option for you is, first, let’s understand the difference between both the products.
Difference Between A Pension Plan With Insurance And A Pure Pension Plan
Shailesh Kumar, Co-founder and Insurance Head at Insurance Samadhan says, “The difference lies in the purpose of saving; we can build a retirement corpus from many saving options. This corpus can be used for many emotional responsibilities like house building, business and education. Thus, the retiring person is left unprotected. Hence the concept of a Pure Pension plan is used where on maturity 67 per cent of the fund is used for pension only through an annuity product. Whereas corpus of saving plan with the purpose of retirement can be used as per the choice”
Experts point out that in a pure pension plan fund is used in a conservative manner building a corpus where 33 per cent amount can be withdrawn as tax-free income and 67 per cent must be used to buy an annuity. Here almost 90 per cent of the invested amount is used for fund building as per approved guidelines of Insurance Regulatory Development Authority (IRDA). On the other hand, pension plans with insurance are regular endowment plans with the purpose of pension. It has a life insurance component and hence bears cost or mortality. Here almost 80 per cent of the invested amount is used for fund-building.
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Compare The Return
“Pure pension plans might offer higher returns as they are solely focused on investment and savings. The returns are dependent on the type of investments made by the plan (equity, debt, etc.)”, suggest Shailesh Kumar.
In a pension plan with insurance coverage, a portion of the premium goes towards life mortality, which might result in slightly lower returns compared to pure pension plans. The exact difference in returns can vary based on the specific products, their investment strategies, and the cost of the insurance component. Moreover, the invested amount is also much lower hence cannot create a similar corpus as of Pure Pension Plan. In Unit Linked Insurance Plan (ULIP), cost of mortality keeps increasing with age thus eating away units.
Which One Should You Choose?
When choosing between the two, it’s important to consider your financial situation, retirement goals, and the need for life insurance coverage. Experts suggest that if you already have sufficient life insurance coverage and are more focused on growing your retirement fund, a pure pension plan might be more suitable.
The author is an independent financial journalist.