Certain insurance agents can ask you to buy a pension-cum-insurance product to solve two significant financial problems. These insurers‘ products typically provide you with pension and term life insurance cover, promising you a comfortable retired life. But, should you accept such an offer? No, says industry experts. “One needs to consider multiple aspects before investing in pension products and getting a protection plan.”
Prateek Mehta, co-founder and chief business officer of Scripbox, said that most pension-cum-insurance products don’t offer sufficient cover. If you already have adequate life insurance, purchasing a pension product could even result in duplication and high costs. “Besides, a traditional pension plan may suffer from poor liquidity. While an exit from a unit-linked pension plan is easier after five years and without any charges, you also need to ensure the chosen plan performs well by beating its benchmark indices,” said Mehta.
When you buy Ulips, you pay the usual administration and fund management charges. Besides, you also pay an additional mortality charge that is levied for providing life cover. Some insurers return the mortality charges at maturity.
Mrin Agarwal, founder director of Finsafe India Pvt Ltd, said, “Opting for such products for pensions planning may not be a good idea, as these products do not provide good returns during accumulation or distribution phase.”
What you should do
The only type of life insurance you may ideally require is term life insurance. Before shortlisting an insurer, consider its financial status (solvency ratio), claim settlement ratio, brand, and premium cost. Hence, assess your insurance requirements and purchase a term life insurance policy accordingly.
Besides, experts suggest that one can construct a retirement portfolio for pension planning. This portfolio should include equity mutual funds and the national pension scheme (NPS). Mehta said, “You can consider investing in mutual funds in which equities comprise a large share, especially while constructing a pre-retirement portfolio over a long term. From the investment perspective, you are better off having a wealth management specialist, constructing the right portfolio and asset allocation for your context. Ideally, this would have no liquidity constraints, would be more flexible on withdrawals, and would deliver superior returns.”
Amol Joshi, founder of Plan Rupee Investment Services, said, “The pension you receive from an insurance product is treated as income and gets taxed at marginal tax slab of the investor .”
Agarwal said, “The best way is to invest in NPS. This is because NPS has much lower costs compared to insurance plans and hence the chance of building a bigger retirement corpus is higher.”
However, you need to invest in NPS cautiously. Joshi said, “NPS does not have the flexibility of corpus withdrawal in absolute emergencies like other products have. However, for NPS, you get a tax savings deduction benefit of ₹50,000, and a low expense ratio also makes it attractive.”
Experts say it is better to take the help of a financial advisor to create a retirement portfolio.