Amrit Nivesh | ARN 113567 | AMFI-registered Mutual Fund Distributor
Most of us earn a salary or a business income today. After a certain age that stops, and the bills do not. A deferred pension plan is one way to set up an income for that stage, and it is sold by life insurers.
This article explains how such a plan works, in plain words. It does not tell you to buy one. Insurance is a long promise, and the details matter more than the headline.
What “deferred” means
You pay for a number of years. This is the deferment period. Then you stop paying, and from a date you chose at the start, the insurer begins paying you a regular amount. That amount is called an annuity, and it is paid at intervals the plan allows, such as monthly or yearly.
So there are two stages. In the first you are putting money in and getting no income. In the second the money comes out as income. The years in between are the wait, and you need patience for them.
What the brochure tells you
Every plan of this kind has a sales brochure, and the insurer publishes it on its website with the policy wording. Read it before you buy, along with an illustration made for your age and premium. These are the things worth finding in it:
- Whether what you get is linked to the market. Some plans are not, which means the pension does not move with the market.
- Whether the plan pays bonuses, or pays only what is written in it.
- Whether the annuity rate is fixed when the policy starts, or set later.
- How you pay: in instalments over the years, or once.
- Whether it covers one person, or a couple.
- How long the deferment can be, and the age limits and minimum amounts.
- The annuity options. These decide whether any of your premiums come back later, and when. In some plans the option you choose cannot be changed afterwards, so this is the choice to slow down on.
What to ask before you buy
- When does the income start, and how long do I have to keep paying before that?
- What exactly will I get each month, and is that figure written in the policy or only in a sales illustration?
- If part of my premium comes back, when does it come back and to whom? Money returned years later is worth less than the same money today.
- What happens if I die before the income starts? What if I die after?
- What if I miss a premium? Plans set a grace period and a way to revive a lapsed policy, each with its own conditions.
- Does the income keep its buying power? A fixed monthly amount stays fixed while prices around it keep moving.
Policyholder.gov.in, the IRDAI portal for policyholders, has a set of questions and answers on life insurance. They cover the lock-in period, the premium you have to pay and what happens if you stop paying it. The portal also warns that wrong statements in the proposal form can lead to a claim being denied.
What a plan like this cannot do
It cannot grow with inflation by itself. If your costs double over twenty years and your income is a fixed amount, the gap is yours to cover.
It cannot be treated as an easy exit. Once you are in, leaving early usually costs you. Treat the deferment period as a commitment.
It cannot replace everything else. A pension plan is one piece. Money you may need soon, health cover and savings that can grow over time each have their own place.
It cannot be judged from a short video. Sales material shows a single example at one age. Your age, your premium, the deferment period and the option you choose will give different numbers. Ask for an illustration made for you, and read it next to the brochure.
Working out how much you need
Before looking at any plan, work out what you want from the money. How much a month would you need after you stop working? For how many years? Our retirement calculator lets you try different monthly needs and different timelines. You type in the numbers, so the answer is only as good as what you put in.