Ch. 3: What are the Different Types of Pension Accumulation Plans

We have already seen what a Pension Accumulation Plan is and why you should buy it. The next important step is selecting the type of plan you need.

Insurance companies offer various types of Pension Accumulation Plans, depending on whether they are linked to the stock market, the premium payment term, the bonuses they offer, etc.

Let’s have a look!

We already know that Pension Accumulation Plans are of two broad categories -

• Unit-Linked Pension Accumulation Plans

  These plans work like unit-linked insurance plans. The premiums you pay are invested in the stock market and your returns depend on its performance.

• Non-Linked Pension Accumulation Plans

  These plans work like regular endowment plans. You pay premiums and in return, the insurer gives you a fixed amount of money when your policy matures. This plan is not linked to the market, and so, the value of your investment remains constant.

These are further divided into various types.

• Single-Premium Unit-Linked Pension Accumulation Plans

  You’re required to pay the entire premium as a lump sum - in one go, at the time of policy purchase. Then, you can enjoy the benefits for the policy duration you choose.
  
  For example, Ashok buys a single-premium Pension Accumulation Plan for a duration of 25 years. He’ll have to pay the entire premium at the time of buying the policy. His retirement fund will accumulate during these 25 years.
  
  Keep in mind - These plans are comparatively quite expensive, since you pay the entire premium in one go.



• Regular Premium Unit Linked Pension Accumulation Plans

  You pay the premiums throughout the policy duration on a regular basis. You can do so monthly, quarterly, semi-annually, or annually.
  
  If you think you’ll be able to pay large premiums every year, you can opt for the annual premium payment option. If not, you can choose the monthly, quarterly, or semi-annual payment option.



• Limited Premium Unit Linked Pension Accumulation Plans

  You're required to pay the premiums for a limited number of years, say, 5 years, 10 years, 15 years, etc. By doing so, you finish off paying your premiums in faster and bigger instalments, and get the premium paying liability off your chest quickly.
  
  For example, Raj buys a Limited Premium Pension Accumulation Plan for a duration of 30 years. He opts to finish paying the plan’s premiums in 15 years. This means that he can complete all his premium payments in the next 15 years and enjoy the benefits of the plan for the rest of the duration.

• Single-Premium Non-Linked Pension Accumulation Plans

  You just need to make a single premium payment under this type of non-linked pension plan. So, you pay the entire premium when purchasing the policy. Then, you can enjoy the benefits for the rest of the tenure.
  
  Keep in mind - These plans are comparatively quite expensive, since you pay the entire premium in one go.



• Regular Premium Non-Linked Pension Accumulation Plans

  You need to pay the premiums regularly for the entire policy duration. The premium amount is calculated on the basis of the policy duration you choose and other factors like your age, gender, etc.
  
  Keep in mind - The premium amount remains constant throughout the policy duration.
  
  For example, Simi buys a Level Payment Non-Linked Pension Accumulation Plan for a period of 22 years. The annual premium payable under her policy is Rs 1.5 Lakhs. So, she will have to pay Rs 1.5 Lakh on an annual basis for the entire policy tenure, i.e., 22 years.



• Limited Premium Non-Linked Pension Accumulation Plans

  You can finish off your premium paying liability a fewer year, instead of paying till the end of the policy duration. So, you can pay off all your premiums quickly and still enjoy the benefits for the rest of the duration.



• Participating Non-Linked Pension Accumulation Plans

  This type of Non-Linked Pension Accumulation Plans lets you participate in the profits of the insurance company. It periodically declares a specific share of the profits that it will pay to its customers - as bonuses or dividends.
  
  So, you or your nominee will receive a bonus or dividends along with the maturity benefit or death benefit.
  
  Keep in mind - These bonuses or dividends depend on the insurance company’s performance, and there’s no guarantee they’ll be paid every year.



• Non-Participating Non-Linked Pension Accumulation Plans

  These plans are exactly the opposite of Participating Non-Linked Pension Accumulation Plans. They only offer a maturity benefit or death benefit. You do not get a share of the profits made by the insurer in the form of bonuses or dividends.
  
  So, these are the various types of Pension Accumulation Plans available with insurance companies today. Before you pick one, make sure you understand how the plan works - to avoid any issues later on. The next important step is to tailor the plan to your needs; read about the various customisation options available - in the next article!