Insurance companies offer individual pension plans both as traditional plans and as unit-linked plans. In traditional plans, the sum assured is the corpus (along with additions and bonus, whether guaranteed or otherwise) and is fixed at the time of taking the policy. In a unit-linked pension plan the corpus would be the value of the fund. The value of the fund in turn, would depend upon the type of fund (combination of equity and debt in various proportions) chosen by the policy holder. The pension plans are usually structured as deferred annuity plans where the policy holder contributes premium over the term of the policy and the corpus so created is used to buy an annuity on vesting. Depending upon the type of annuity purchased, the annuitant receives a pension over their life time. Apart from the elements of an insurance contract such as the sum assured, premium details, the minimum and maximum age at entry into the plan, insurance companies specify the minimum and maximum age at vesting. Vesting refers to the age at which the corpus has to be used to buy the annuity. The policy holder has to decide the sum assured and the vesting age that is required. Based on these factors and the age of the policyholder the applicable premium will be decided in a traditional plan. In a unit-linked plan, the premium that the policy holder can pay is decided first and is invested in the fund of choice to create the corpus. Unlike a traditional plan, the value of the fund on maturity is not known in a unit-linked plan.
Death and Maturity Benefits
If the policy holder dies during the term of the policy when the corpus is being accumulated, the death benefit would depend upon the terms of the policy. If the pension plan offers life cover, the death benefits in case of a traditional policy will be the sum assured. In case of unit-linked pension plans, the death benefit will be the higher of the sum assured and fund value, only the fund value or fund value and sum assured, depending upon the terms of the policy. If life cover is not offered then the insurance company will repay the premiums paid with interest. The maturity benefit will be the sum assured along with benefits such as bonuses in case of traditional plans and the value of the fund in case of a unit-linked plan. One-third or one-fourth of the corpus may be withdrawn as a tax free lump sum. Commutation refers to the exercise of the facility of taking a portion of the annuity corpus in a lump sum. The balance has to be used to buy an annuity which will provide the pension. The guidelines issued by IRDA now require that the annuity be bought from the same insurer with whom the accumulation of the corpus was done. If death occurs during the period when annuity is being drawn, then the benefit will depend upon the type of annuity that has been bought. This can either be cessation of pension, continuation of pension to spouse, repayment of annuity purchase price or a combination. If the nominee is the spouse, then the death benefits may be taken as a lump sum or in combination with an annuity. If the nominee is not the spouse, then the benefits are paid out as a lump sum. The premiums paid towards pension plans are eligible for benefits of deduction under Section 80C and 80CCC. Similarly, the amount received on commutation and other benefits received on maturity or death is also subject to exemption under the Income Tax Act.