Confused thinking between risk protection and investment return plagues the process of deciding about insurance. No financial product is everything for everybody, and insurance certainly isn’t. Yet, it is human nature to look at all possible benefits and judge their costs and benefits, comparing them with costs and benefits from other financial instruments.

In this context let us see about the pension policy, or the annuity policy as it is called. You can pay the premium in one shot and start receiving periodic annuity payments immediately. Or you can pay premium in installments over a chosen period, the accumulated corpus with its returns then becomes the premium leading to annuity payments. The method you choose depends on your stage in life. As typical investors we see this like a fixed deposit or a recurring deposit with the returns coming in installments over time. The rate of return never compares favourably with FD rates, however, and so the decision stalls.

What we forget is the uncertainty from the side of the insurance company. The premium is set and the annuity quantum is set, but how long the annuity will be paid depends on the remaining lifespan of the investor. One person could receive annuities for 10 years and another for 30 years, at the same premium. For this risk that the insurance company assumes, they charge a cost and that accounts for the difference in return rate between annuities and a simple product like a fixed deposit.

So, what inhibits insurance sales? In the case of annuities, it is the fact that the insurance company covers the risk of us living too long is not clearly articulated. We think an FD will give better returns, but forget there is a reinvestment risk. On renewal, the rate may have gone down and if I need annuities for 30 years, the interest rate cycle could go up and down several times, something individuals just can’t manage.

There is another sticking point when it comes to annuities. Your annuity is taxable just like any income and that, in the post-retirement years, hurts! The income tax laws may have their own logic. There is some amount of tax deduction on annuity premium, immediate annuity and annuity through the National Pension Scheme, but otherwise, as prospects point out, they are paying premium out of post-tax money and there is no social security system in India, which means annuities should not be taxed, at least to a certain threshold. Retirement planning options are yet growing and maturing, we need to protect ourselves given the shortcomings of the system as they stand.

(The writer is a business journalist specialising in insurance & corporate history)

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