Purchase price of annuity plans to increase

With Irdai setting minimum monthly payout at Rs 1,000, customers will be charged higher purchase price

The minimum purchase price for annuity plans, or the amount used to buy annuity plans, could see an increase following the regulation issued by the Insurance Regulatory and Development Authority of India (Irdai), which says the minimum monthly payout in case of annuity plans should be at least Rs 1,000, excluding any bonus or profit.

As of now, there is no restriction on the minimum amount either for the purchase price or the payout. It varies from company to company. Going ahead, in cases of plans where the monthly payout is lower than Rs 1,000 a month, the minimum purchase price will have to be increased.
 
“The move will ensure policyholders get a reasonable monthly payout. Since there is no minimum restriction currently, when interest rates go down, the payout also decreases. This will ensure a bare minimum amount for policyholders,” says Sujoy Manna, vice-president (products), HDFC Life Insurance.

The increase in the purchase price will be more for younger policyholders because at that age, annuity payout is lower, as it is paid over a longer period. At a higher age, it might still be possible to purchase an annuity at the same price as the payout is higher, adds Manna.

For a minimum monthly payout of Rs 1,000, the minimum purchase price will have to be Rs 1.5-2 lakh, says Naval Goel, CEO, PolicyX.com. But there are policies where the minimum purchase price is lower.

For instance, in the case of Life Insurance Corporation of India (LIC)’s Jeevan Akshay, an immediate annuity plan, the minimum purchase plan is Rs 1 lakh for offline and Rs 1.5 lakh for online.

For a 30-year-old, the annual payouts range between Rs 6,860 and Rs 7,190 depending on the payout option chosen. The payout is highest in the annuity payable for life at a uniform rate option and lowest in the annuity for life with a provision of 100 per cent of the annuity payable to spouse during his/her lifetime on death of annuitant option. In case of the latter, the purchase price is returned on the death of the last survivor.

HDFC Life offers five bands of purchase price, starting with less than Rs 2.5 lakh and going on to Rs 5 lakh and above. The minimum payout for a 30-year-old varies between Rs 1,000 a month to Rs 10,000 a year.

“The minimum amount is slightly lower in case of annual payout because you are getting the entire amount at one go, while in a monthly payout, you are deferring rest of the amount due to you. It is similar to premium for a life insurance policy, where the annual premium is lower than a monthly premium paid over a year,” says Manna.

Although Irdai said it might issue separate instructions for withdrawing products that are not in compliance with these regulations, insurance industry officials are hopeful the regulation will apply only to new policies and not to policies that have been already sold.



“In case of policies already sold, the payouts have already begun. It will be difficult for companies to get back to policyholders and ask them to increase the purchase price or buy an additional plan,” says Sanjay Tiwari, executive vice-president and head (product management) at Exide Life Insurance.

The rule might not apply even in case of deferred annuity plans, where payouts will start later on, because the policyholder cannot be forced to use more than the mandatory two-thirds of the corpus to purchase annuity, he adds.

Annuity plans with return of purchase price account for the bulk of plans sold. It is in this option that the payout is the lowest.

If the minimum purchase price goes up, it might make annuity plans less attractive. Even companies are not keen on selling because distribution margins are very low, says Tarun Mathur, associate director, Policybazaar.com. “Today, bulk of the annuity plans are sold by LIC and the purchase plan is lower than Rs 2 lakh. This might not be possible going ahead.”