A pension plan is one of the most misunderstood financial instruments in India. Read on to know more about the important terms relating to pension plans.
If you are a working professional, someday you would have to retire. When you retire, you may not have the regular income you had throughout the working years, and you may have several questions going through your head. How will I take care of the expenses? Do I have enough savings to live a comfortable post-retirement life?
The answer to the questions is simple – Retirement plans or pension plans, a time-tested, long-term investment plan that offers flexibility and valuable returns.
To invest in a retirement plan, you must understand what the fine print of the policies denotes and be aware of the financial terminologies. If you are a first-time investor in retirement plans, you should be mindful of the following terms:
When you purchase a pension, you must pay the premium. It is essentially the amount you pay the insurance company to keep your policy active. Most insurance companies give policyholders the flexibility to choose the mode of premium payment. You can either opt for a single payment or the regular payment mode, where you can pay the premium either monthly, quarterly, half-yearly, or yearly till the end of the policy term.
The insurance companies consider different factors like age, income, the pension you expect to receive post-retirement to determine the premium. You can use the pension calculator to know about the premium applicable to the plan you choose.
Riders, which are also commonly referred to as add-on covers, are additional coverage options that you can purchase to widen your policy scope. You can buy any number of riders you want to cover your specific needs. Remember, the riders come with an additional cost, and it will increase your policy premium.
Nominee or Beneficiary
When you purchase any pension plan, the insurance company would require you to mention the beneficiary or nominee in the application form. The nominee is the person who receives the death benefit and other policy benefits in the event of your demise. You can also appoint multiple nominees and specify the percentage share each of the nominees may receive.
This refers to the actual length of the plan for which you invest in the plan. For example, if you buy a policy that requires you to pay a premium of Rs. 10,000 for 30 years, then ’30 years’ is the investing period or the accumulation period.
The age at which you start getting a pension from your insurance-cum-pension plan is called the vesting age. For most pension plans, the vesting age is 55 years.
The total amount you are due to receive at the end of the investment period is called the fund value. Depending on the type of pension plan you choose, some policies have a pre-defined fund value. For the pension plans that invest in the stock market, the fund value is inclusive of the returns earned on the day of the plan’s maturity.
The amount paid by the insurance company to the beneficiary upon the policyholder’s demise is known as the death benefit. All pension plans in India provide a death benefit; however, the structure of the payment and the value of the payment is defined by the type plan you hold. Generally, the death benefits are paid in a lump sum amount or as a monthly contribution.
Now that you are aware of these terminologies, make sure that you carefully understand the terms and conditions of the pension plan and choose the right plan to suit your needs.