Assured benefit

Written by fe Bureau | Updated: Nov 16 2012, 09:17am hrs
Pension products of insurance companies may see an overhaul once again as the insurance regulator is linking them with annuity. Insurance companies will now have to provide non-zero positive rate of return on the premium paid and an absolute amount will have to be paid on death or maturity. The amount of such a guarantee will have to be disclosed at the time of purchase of the contract.

All pension products will be offered either as individual-linked pension or group-linked pension products. They will have explicitly defined assured benefit payable on death and vesting. The defined assured benefit will have to be disclosed at the time of sale and utilised on the vesting date or on the date of death.

The Insurance Regulatory Development Authoritys (Irda) draft exposure on standard products has said that all pension products offered by insurance companies will have an insurance cover throughout the deferment period, or may offer riders. The sum of all the rider premiums attached to the pension product will not exceed 15% of the premium paid for the pension policy. Such rider premiums will be separately accounted for and will not be included in arriving at the assured benefit.

For financial planning, any pension product offered by insurer will have to comply with the sales literature guidelines issued by the Life Insurance Council. An illustrative target purchase price for each policyholder will consider the premium payment, capacity, age, vesting age and the future expected conditions. The policy will have to mention any possible risks involved in purchasing the targeted pension rate in meeting the targeted purchase price. The policy will also have to give an illustrative target annuity/pension rates for the target purchase price.

Policyholders will have to be given a yearly statement, in addition to the benefit illustration, which will have to mention the current accumulated value or the available amount.

The expected accumulated amount on the date of vesting will be on the basis of the then prevailing rate and the assumed economic and demographic environment. The likely annuity amounts will be vested on the then prevailing annuity rates and on assumed interest of 4% per annum and 8% per annum with the caveat that the projected rates will not reflect any guarantee.

On the date of vesting, the policyholder can either commute the amount to the extent allowed under Income Tax Act and utilise the balance to purchase immediate annuity with the same insurer that will be guaranteed for life at the then prevailing annuity or pension rate, or utilise the entire proceeds to purchase a single premium deferred pension product with the same insurer.

The third option is to extend the accumulation or deferment period within the same policy with the same terms and conditions as the original policy, provided the policyholder is below 55 years.

Also, if the policyholder dies during the deferment period, the nominee can utilise the entire proceeds of the policy or a part of it for purchasing an annuity at the then prevailing rate from the same insurer or withdraw the entire proceeds of the policy.

The exposure draft has also clarified that guaranteed for life will mean an amount of annuity is guaranteed in absolute terms, at the time of vesting or at the time of surrender, or at the time of sale, and such a guaranteed amount will be payable as long as the policyholder survives.

For group-linked pension products with the defined benefits subscribed to by an employer, there will be an assured benefit that will be applicable on the entire superannuation fund available with the insurer. The superannuation fund, along with such assured benefits, will be made available to make payments for exits, in accordance with the scheme rules for death or retirement.

In such products, the benefits accruing on exit like death, retirement, termination, etc, will be payable as per the superannuation scheme rules of the employer.

In the last two years, the insurance regulator has come out with a series of reforms on pension products offered by life insurance companies. In 2010, it mandated companies to pay a guaranteed 4.5% return to policyholders. After much protest from insurers, the regulator withdrew the guarantee clause, but introduced certain implicit guarantees like non-zero return.

Last year, the regulator had come out with new guidelines on unit-linked pension plans and traditional pension plans where insurance companies had to withdraw their products from January 1 this year if they did not conform to the new guidelines. Within two months, life insurance companies had to design new products and even get the regulators approval, which, at times, takes months.

The trouble with unit-linked pension products (ULPPs) began in September 2010 when Irda made it mandatory for life insurers to offer a guaranteed return of 4.5% on the investment. This was done to win the battle against mutual funds, but it started backfiring as companies were not willing to launch any new ULPPs. Insurers argued that as there are no long-term financial instruments in India to offer a guaranteed return for a period of 15 to 20 years, it is difficult to find safe investment avenues for the ULPPs premium to match those guarantees.

A year later, the regulator succumbed to the pressure and abolished the mandatory minimum guarantee.

The regulator's order in January this year had mandated that every insurer will have to guarantee either a non-zero rate of return on premiums paid from the date of payment to the date of vesting or an absolute amount which should result in a non-zero return. In both cases, this has to be disclosed at the time of purchase of the policy.

Also, the order had stated that for surrender value, if the insurance product is on a unit-linked platform, the surrender value will be the higher of the fund value and the premium accumulation at a guaranteed rate on the date of surrender.

Analysts say clarity on pension products is pertinent. For the next few months, taxpayers will take insurance policies, especially pension products, to get tax exemption and that's when life insurance companies also report growth in new business premium.