ULIP or Pension Plans: Which is better for Retirement Planning?

1. ULIP or Pension Plans: Which is better for Retirement Planning? What is a pension plan? A pension plan is a plan designed specifically for retirement planning purpose. These plans are called the reverse of life insurance as they provide annuity payouts till the death of the policyholder. Let us understand the plan in details: Types – there are two types of pension plans. One is the Immediate Annuity Plan wherein upon payment of a lump sum amount, called the Purchase Price, the insurer promises to pay annuity instalments from the next chosen frequency. There are multiple options of receiving such annuity payouts and joint life payouts are also available which pay annuity till the spouse’s lifetime too. The other type is a Deferred Annuity Plan wherein normal premiums are payable for the plan tenure which accumulate into a corpus. On maturity, the corpus should be used to purchase an Immediate Annuity Plan or be invested into another Deferred Annuity Plan. Life cover – Immediate Annuity Plans do not provide life cover. The annuity payments stop when the annuitant, or his spouse, if joint life annuity option is selected, dies. There is a life cover in Deferred Annuity Plans which pay a pre-defined death benefit if the insured dies during the plan tenure.

2. What are ULIPs? A unit linked insurance plan, or ULIP in short, is a market linked plan. The premiums are invested in a fund of the policyholder’s choice. The funds invest the money in the capital market and earn market linked returns. These plans provide many flexible features like partial withdrawals wherein money can be withdrawn from the plan, switching option which allows switching between funds, top-ups which allow additional premiums to be invested in the plan among others. The plan pays a maturity benefit and also a death benefit as life insurance cover is provided with the plan. ULIP or Pension Plan – which one is the better alternative for retirement planning Both types of life insurance plans – ULIPs and Pension plans, can be chosen if you are looking to create a retirement corpus. Both have their merits and demerits over one another and before you make a choice such facets demand your consideration. So here we go: Pension plans over ULIPs Now it is time to see where Pension Plans score a goal against Unit linked plans and why then can be chosen. Earmarked investments – though ULIPs provide flexibility when it comes to the usage of benefits, a pension plan provides an earmarked investment option. Since the benefits of a ULIP plan can be used in any which way, you as a policyholder, get tempted to draw upon such benefits whenever you face a financial crunch which depletes your retirement corpus. Pension plans, on the other hand, provide benefits only to be used forreceiving annuity which earmark the benefits to serve only as retirement funding. Though rigid, this is also beneficial if we look upon the dedicated purpose of a pension plan which is retirement funding. Steady source of income – pension plans provide annuity payments till our lifetime and if we opt for joint life annuities, our spouse can also enjoy such annuity payouts even in our absence. Thus, these plans provide a steady source of income in retirement where other sources of income might dry us. ULIPs on the contrary provide a lump sum benefit which might be used on other avenues and might not last our lifetime. Flexible retirement funding – pension plans come in ULIP variants too and the flexible options which a ULIP Plan provides like partial withdrawals, switching, top-ups etc. can also be enjoyed through unit linked pension plans. Thus, you can build up a retirement corpus in a flexible manner by investing in such unit linked pension plans which provide the best of both worlds – a ULIP plan and a pension plan. What should you do? The comparative advantages of both the options against each other might have left you confused. But, the solution is simple. It all comes down to your requirement and judgement. But, before you make your choice, knowing the intricacies of both the plans is essential so that you do not end up investing in a wrong product. The next step is analyzing your sense of discipline to your goals. If you are disciplined

3. enough to create a retirement corpus a Unit Linked Plan would help you do so even if the benefits have a universal usage. You can actually benefit from such universal usage feature in a cash crunch when you desperately require financing. On the other hand, if you are prone to investing in fixed return products or keep your money idle in bank account and thus may be depleting your retirement corpus, a pension plan should be your choice as it would create a forced retirement corpus with no possibility of using the corpus on other activities. Do spare a thought about the tax implication though. Since annuity payouts are taxable, ascertain whether your income would qualify for taxation post retirement before choosing a Retirement Plan Policy. If yes, a ULIP would be a better alternative as the benefits are tax-free. So, analyze your situation and make an informed choice. Source: http://bit.ly/2cC7owL