More annuity products are coming to the market. Customers will benefit, especially with IRDA specifying that the annuity phase should be from the same insurance company that sells the pension product. Some existing annuity products offer low return, so buyers beware

Annuity is not a product that insurance companies have hard sold till now. Since many insurers offer annuity rates which are much below Life Insurance Corporation of India’s (LIC) annuity rates, LIC sells 95% of the annuities in India. This could soon be changing as competitive annuity products having started entering the market. SBI Life Annuity Plus was recently launched with annuity rates competing with LIC Jeevan Akshay VI. Star Union Dai-ichi (SUD) Life will soon come out with a product offering higher rates than LIC.

According to Kamalji Sahay, managing director and chief executive officer, SUD Life, “We have filed for a revised annuity product which will offer better rates. It will compete with annuity products from LIC. In the past, for some age brackets, LIC offered higher rates. The revised product will offer higher rates than LIC.”

Competitive annuity products will help customers as Insurance Regulatory and Development Authority (IRDA) guidelines on pension plans state that at the time of vesting, the annuity shall be provided by the same insurer who contracted the original pension policy. It means that the insurance company which did the accumulation phase of the pension plan should continue with the annuity phase, too. If the annuity product rates are not competitive, the policyholder will lose as there is no option to change an insurer for the annuity phase.

You can also buy immediate annuity which has no accumulation phase. Pension products offer deferred annuity (after accumulation phase) or immediate annuity (no accumulation phase). Based on the lump-sum amount the policyholder invests at prevailing annuity rates, the insurance company guarantees a fixed yearly payout for lifetime. You can choose an option wherein on death; the nominee gets back the invested lump-sum. Like deferred annuity, there are other options to choose such as getting higher annual payment with no return of the purchase price.
 

Source – Moneylife research. Immediate annuity rates of select insurance companies. Rates for annuity option wherein purchase price is returned to the nominee on death of the Annuitant

Unlike LIC, which offers immediate annuity from age 40, Tata AIG Life Easy Retire offers immediate annuity from age 21 and that too with better rates. LIC has slightly better rates for age above 60 years. Tata AIG Life Easy Retire offers 7.128% against 7% on LIC’s Jeevan Akshay VI for a 50-year-old person with return of purchase price to the nominee. Tata AIG’s annuity rate for a 21-year-old person is 7.086%. If customer pays Rs5 lakh (and above), the rate rises to 7.336%. With average age expectancy of 66 years today, Tata AIG agrees to pay annuity for at least 45 years, in this case. It is a huge interest rate risk that Tata AIG Life is taking. It is a good immediate annuity product for you.

Max New York Life’s Immediate Annuity plan offers rate of 3.61% as against LIC’s Jeevan Akshay VI offer of 7% for a 50-year-old person with return of purchase price to the nominee. This is almost half of what LIC is offering! Imagine a customer buying a pension product and getting stuck with annuity rate being half of what another insurance company offers—it will be a lifelong regret. The new IRDA regulatory changes which force the customer to tie up with the same insurer for the annuity phase of pension product will, in fact, worsen this very situation.

There are some valid reasons for Max New York Life’s conservative approach to annuity rates. Rajesh Sud, chief executive office and managing director, Max New York Life, says “Annuity is essentially the opposite of insurance. There is interest rate risk and longevity risk. Interest rates in the past decade itself have gone down from 12% to 6% and risen again to 10%. There is a lack of very long-term debt instruments to lock-in the rates and offer annuity at low risk to the company. As long as the policyholder lives, the insurer will continue making the payments. There is lack of research on the annuity market. Many international companies have gone bankrupt by not managing annuity risk properly.” To his credit, Mr Sud is also of the opinion that customers should be given a choice regarding the insurance company for administering the annuity phase of the pension.