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Published in Mint on Dec 15 2016, Written by Abhishek Bondia

I will retire in 5 years. I am single with no dependents. I have diabetes but have not gone through any other major treatment. How can I plan for my retirement? Would you recommend an insurance plan?

—Oscar D’silva
The key risk for you is the danger of your savings running out. You would not have an active source of income, but expenses will continue to rise. You should buy a life annuity plan at retirement. It will assure you a steady stream of income for as long as you live. A life annuity plan is issued without any medical underwriting, so your health status will not affect premiums. Currently, a life annuity pays about 9% of the purchase price if you select an option where there is no death benefit. Although the interest rate on annuities will move in tandem with the declining interest rate scenario, annuities that don’t have a death benefit have the highest payout. Do note that annuity proceeds are considered as taxable income.
You may also consider buying a health insurance plan that caters to diabetics. These have several restrictions but it is better to have these than not to have health insurance at all.

I had bought a single premium life insurance plan about 10 years ago. At the time of purchase, the plan had some net asset values (NAVs) listed out. How do I measure or assess my returns? Should I continue with this plan or not?

—Rohit Kanti
The plan you bought is a unit-linked insurance plan (Ulip). Returns in Ulip are linked to the change in NAV. You should ask for the current NAV and number of units outstanding, from the insurer. The multiplied value of per unit NAV with the total number of units, is your total current fund value. The change in total fund value compared to your initial investment is your gain or loss. It’s important to look at total value rather than just the unit NAV because many of the charges are taken by reducing units without impacting the unit NAVs.
Returns should be assessed by looking at the compounded annual growth rate (CAGR), rather than absolute change. For example, if the fund increased by 50% in last 10 years, the actual return delivered by the plan is around 4% per annum. Further, returns are strongly influenced by the underlying exposure to debt and equity. If a large proportion of funds is invested in debt, a 10% return may be an excellent outcome. High exposure to debt also increases likelihood of protection of principal amount. In your assessment of the returns, you should be mindful of the existing fund allocation to equity and debt. There are benchmarks available for each type of fund. For example, the Nifty or Sensex are good benchmarks for equity mutual funds.
Other than returns, you should evaluate the fund management charges to decide if you should stay invested. Ulips issued before October 2010 had high upfront charges. The ongoing administrative charges for such plans were also generally higher than current levels. But since the bulk of administrative charges are absorbed by you, you may stay invested, if the returns meet your expectation.
How can insurance help me create a corpus for my 1-year-old’s higher education and marriage. ?
—Vikram Bhanot
First, you should purchase a life insurance for yourself and your spouse, assuming both of you are working. A life cover will ensure that in case of premature death of either of you, the family gets a lump sum amount. This compensates for loss of future income, and savings. Life cover should be at least 10 times of your annual income. Add any outstanding liability in your name such as a home or personal loan to the sum assured you buy
Second, you could set aside a regular amount to invest in a regular paying Ulip. Charges across all Ulips have been capped. You should also evaluate investments in other instruments such as mutual funds. There are several child specific Ulips, which have special riders such as waiver of future premium in the case of death of the parents. Unless a specific feature really attracts you, keep risk protection separate from investment. Buying a separate term and investment plan ensures you can choose the best providers in each category.