Life insurance companies selling pension products sans life cover has made the securities markets

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regulator, Securities and Exchange Board of India (Sebi), take up the matter on behalf of the mutual fund industry.

The Insurance Regulatory and Development Authority (Irda) took up the cudgels on behalf of HDFC Standard Life Insurance company, which was singled out by the Sebi for offering pension products that do not provide any kind of life cover.

For Sebi, a financial investment product that does not provide any life cover is akin to a mutual fund investment and, hence, it last week sent a notice to HDFC Standard Life, a company regulated by Irda, to explain its product.

HDFC Standard Life did not respond to the notice and instead, Irda decided to step in.

R Kannan, member (actuary) at Irda, last Friday met Sebi officials to explain the pension and annuity products offered by life insurers and to impress upon the securities regulator that the pension plans offered by insurers are well within the Insurance Act.

Kannan told Financial Chronicle that Irda sent a reply to Sebi on Friday explaining how pension plans offered by life insurance companies do offer life cover and, hence, cannot be equated to a mutual fund offering annuity.

“Pension products have two stages, i.e. accumulation stage and annuity stage. Though there is no cover offered in the accumulation stage, the annuity stage will pay out the entire amount to the nominee in case of death of the policyholder once the annuity stage starts,” Kannan explained.

“With this, I expect all doubts are put to rest and pension products by insurers are no way similar to mutual funds,” Kannan added.

Sebi is expected to formulate its views on Irda’s response to the notice that it had sent to HDFC Standard Life. The pension plans do not appear to be providing any life cover as the amount paid to the survivor during the annuity period is the one that gets accumulated during the first (accumulation) phase of the pension plan.

Sebi stepped in because maturity proceeds of pension plans are exempt from tax. Citing the IT Act, Sebi said unless there is life cover that is five times the sum assured, the tax break is not applicable.

“We have left it to the Irda to take it up on behalf of all insurance companies as everyone is offering the same plan with various fund options,” a senior HDFC Standard Life official said. Irda had approved HDFC Standard Life's pension product that Sebi objected to.

It is mandated that the corpus accumulated in pension plan be utilised for the purchase of annuities from a life insurance company and the tax break is available only in the form of regular income from annuities.

The pension policyholders can encash up to one-third of the accumulated corpus. If the remaining two-third is not invested in equity, it is subject to tax.

Insurance companies in India offer various types of insurance products, including pure protection term cover; unit-linked insurance plans, pension plans with annuity payouts, endowment plans and health insurance products. While life covers offer insurance during the entire term of the insurance plan, in case of annuity, the payouts happen after the term gets over till the insured person survives.

According to Kannan, pension products offered by most insurance companies are similar in terms of benefits and they conform to the Section 211 of the Insurance Act and hence can’t be questioned.