Claim Money Stuck in Pension Schemes: Insurance and Regulatory Development Authority of India (Irdai) has disclosed that over Rs 15,000 crore of the policyholders’ money was lying unclaimed with life insurance companies. The regulator asked companies to trace policyholders or beneficiaries and return the money.
But those who had purchased pension policies had no way to claim their money if the maturity amount was below the minimum purchase price of the annuity plan. Until now, that is. In a move that will provide relief to policyholders, the regulator has asked insurers to refund the money, in case of such policies.
What this means
In a pension plan, the premium is accumulated as a fund. At the end of the policy term, that is, at maturity, this money is used to purchase an annuity. This is mandatory. Only one-third of the amount can be withdrawn and the rest has to be used to purchase an annuity plan. The policyholder gets a regular pension out of this annuity amount.
But if the maturity amount is lower than the minimum purchase price of the annuity plan, the insurer was not able to offer an annuity plan to the policyholder, nor refund the money.
As per a government gazette, issued in 2015, the minimum annuity has to be Rs 1,000 per month. So, for this amount, ideally the maturity value has to be Rs 1.5 lakh at least, given the current annuity rates of 7.5-8%. However, in cases where the policyholder has not paid premiums regularly or not paid for a considerable amount of time, it is possible that the maturity value is below this. In such a case the money continues to remain with the company, said Chinmay Bade, vice-president, product, HDFC Standard Life Insurance.
“In fact, it is a violation of law for insurance companies to refund money in cases, where the accumulated fund value is not enough and the amount when it is converted into an annuity, comes below the minimum required amount as per regulation,” said Anilkumar Singh, chief actuarial officer, Aditya Birla Sun Life Insurance.
This happens because often policyholders don’t pay the premium for the entire term of the policy. If for instance, you have bought a pension policy for 20 years, but paid just for just a few years, the amount that is accumulated may not be very high. Only if you pay a premium for all the 20 years, will you be able to accumulate a good amount.
Or it could also happen that at the time of purchasing the policy, interest rates were high, and you chose a particular premium expecting a certain maturity amount. But if by the time policy matures interest rates fall, the premium you had decided initially may prove to be insufficient to generate the required corpus, Singh said.
Impact for customers
Irda’s latest circular addresses this deadlock and has allowed insurance companies to refund the money in such cases. However, this beats the purpose of an annuity plan, where the purpose is to ensure a regular income for the policyholder after retirement.
The Irdai’s latest circular has allowed insurance companies to refund the money in such cases. Customers must ensure that they don’t discontinue their policy mid-way and that the premium should be commensurate to provide for an annuity as per the lifestyle they wish to lead after retirement ,” Bade said.
According to Santosh Agarwal, associate director and cluster head-life insurance, Policybazaar.com, most annuity products start at around Rs 1 lakh and they are single-time investment products. Hence, to avoid such situation (where the maturity amount falls below the minimum purchase price), when you start your pension plan, you should apply a growth rate that will ensure that the maturity will be more than Rs 1 lakh for sure.
“An annuity is a disciplined way of planning for retirement. If you start early and plan for the future. You can save like a Systematic Investment Plan (SIP) format and pay premiums for long term, say 30 years or so. The way to to decide is to project today’s expenses and what the expenses will be when you retire. Depending on that you should arrive at the amount you need to invest,” she said.
In case of a money back or endowment policy, the maturity is automatically paid, provided your contact details are updated. In case of pension policies, the regulatory restriction will now be addressed thanks to Irdai’s relaxation, Singh said.
MONEY YOU NEED
- Rs 1,000 Minimum annuity limit per month as per government gazette of 2015
- Rs 1.5 lakh Minimum maturity value required to pay this monthly pension