A good annuity product can be a boon for families with special needs children to care. A product like this can generate a fixed income for the lifetime of the child which is the major concern for any parent. However, annuities from life insurance products have failed to meet this objective.
LIC Jeevan Shanti is an annuity product which has provision for special needs dependent. Not having enough options for generating regular income the product is of keen interest to the families. But before you buy an annuity it’s wiser to asses.
Let’s review and see to what extent you can rely on these product for providing a regular income to your special need child care-
What is Annuity?
In general terms it is a fixed stream of payment for a life term or for a pre-defined period. In insurance, this is received through lump-sum investment or by making a regular contributor for a defined period. The main objective of an annuity is to counter the risk of longevity and to some extent, inflation.
Type of Annuities
There are two basic types of annuities designed in the thus LIC insurance product:
- Deferred : In this option, the payments start after a specific period which maybe 5 years to 40 years. While buying the product you decide from when you wish to receive the annuity payouts.
- Immediate: Here the payment starts from next month or within a year of investing in the product.
LIC Jeevan Shanti has both these type of annuities. But you have to pay a lump sum amount to purchase any of these annuities. Based on what life stage you are annuity option can be decided.
Payout Options Under LIC Jeevan Shanti
It has following options for annuity payout:
- A lifetime without return of purchase price: The annuity is paid lifetime and stops once the investor dies. The principal amount (purchase price) is retained by the company.
- A lifetime with the return of purchase price: Here the annuity is paid lifetime to the investor and the purchase price is returned to the nominee after his/her death.
- Annuity guaranteed for a certain period: Annuity is paid for a defined period, say 10 0r 20 years, irrespective of survival of policyholder. Beyond this, the amount is paid only to the policyholder until he/she dies.
- Joint Annuity: Here, the spouse gets the annuity for a lifetime after the death of the primary annuitant. Within this joint life, there is an option where the surviving spouse is paid 50% or 100%. In the other options post both the spouse, the purchase price is returned to the nominee.
- Increasing Annuity– Here the annuity is enhanced by 3% on a yearly basis till the lifetime of the annuitant.
Detailed features can be read at below link:
Benefit for Special Needs Dependent
This LIC product has specifically mentioned benefit for disabled dependent. Here there are 2 options available to special needs children families-
- The first one is the annuity to the policyholder till his/her lifetime with return of purchase price. By making the disabled dependent as beneficiary the purchase price will be returned to him/her in the form of annuity.
- In the second option the disabled dependent can be added as a secondary annuitant. On death of the proposer the annuity will be paid to the second annuitant which is the disabled dependent.
In both the options the annuity is coming to the special needs dependent fulfilling the need of regular income. The other larger benefit in the product is that the minimum pension criteria and age eligibility will not apply. This means more families can consider buying annuity for their special needs child lifetime.
The Returns from the Product
The rate of annuity in the product changes with age and features. However for families with special needs dependent the product list out a lower purchase price than the given rates. This means the product has higher annuity payout in case of disable dependent. As per the rates offered by the company below is the annuity payout for Rs 10 lakh investment:
|Age last birthday||Yearly annuity amount under annuity option|
Source: The Financial Express
|Age last birthday||Deferment Period|
Source: The Financial Express
Looking at above chart the annuity returns are higher in 2 options-
- If you start receiving monthly income at higher age
- If you choose to receive pension only for yourself
For special needs children families the purchase price will be lowered for the same annuity given above. For some other benefit like policy bought online or higher investment amount LIC will enhance the annuity rate.
Disadvantages of Annuity Products in India
In India annuity products have not seen much of the success. Pension plans were bought heavily by investors but the decision was more from the tax saving perspective. The reasons are manifold which need to be addressed in order to make this a viable option. Given below are some of the reasons due to which annuity products have lost attraction among the investors:
- Annuities are illiquid. Annuitants forfeit the option to liquidate and exit in case of unforeseen expenditure.
- Generally, in fixed income assets, the basic principal is returned to the survivors if the investor dies. In annuity products, the option of leaving bequeath to the family is very limited and the cost an investor pay is too high.
- Return from annuity products has been the major concern for the investors. The returns in the past have averaged 6%.Even in Jeevan Shanti the returns are higher only when you opt for yourself or starts income at higher age.
- Inflation Risk- Most annuities provided in India are fixed for the term. Since inflation erodes the value of money, with increase in longevity, even a small increase compound the losses. Hence inflation adjusted annuities are need of the hour. Though LIC Jeevan Shanti has a 3% increase feature bit it does not help in beating inflation.
- Taxability – Annuity is taxable at ones income tax slab which means a much lower income in your hand. Even if you earn 7-8% but are in the highest tax slab what you get in hand will be a fairly lower amount.
Annuities are for life time and there is no limit to amount of investment. However, the average return offered, taxability, flexibility and inflation risk makes it unviable choice to rely upon completely. The age at which you wish to have annuity the rates may not favor. Contrary to this mutual funds have been found to be more tax efficient investment and you are able to address inflation. Then there are fixed income options which would have offered a fixed interest at bit higher rates.
Is It Favorable for Special Needs Families
Though any product which can offer life time regular income will be a good option. But if the product do not factor in inflation and tax efficiency then you cannot rely upon completely. For special need children families even though pension may come to special needs child- who manage it and how needs to be addressed. Also the benefit of annuity will be post parents lifetime. Till then it will be received by the parents which may get taxed at higher rates.
Considering all these features it will be difficult choice for special needs children families to rely upon an annuity product. The requirements will increase with inflation but the pension income will not. This will create a huge gap going forward. If the taxability of the annuity income is at higher rate the contribution required will be too high to earn the desired income. Hence it’s advisable to consider annuity product partly for your requirements and look at alternatives like mutual funds to enhance your income.