If child plans are your choice, what to buy

If child plans are your choice, what to buy

With unit-linked pension plans slipping into oblivion and a regular unit-linked insurance plan (Ulip) becoming more about capital guarantee, insurers are now focusing on child plans, especially in view of increasing demand. Says Rajeev Kumar, vice-president (product and pricing), Bharti AXA Life Insurance Co. Ltd: “Child plans have always been a popular product but recently about 90% of our customers approach us for child plans."

Saving for your child is not just a prudent financial decision, but also an emotional one. And a typical child plan with its insurance plus investment feature feeds on that emotion. But before you succumb to that emotion and bring home a child plan, you need to know thoroughly what it is and when it makes sense.

Basic structure

In a child plan, the proposer or the policyholder is the parent while the child is the automatic beneficiary, the nominee who gets the death benefit or the sum assured. Typically child plans are available for children below 18 years of age and is available both as a traditional product and a Ulip.

Also See Points to note (PDF)

What’s on offer (PDF)

What it costs (PDF)

Primarily, child plans are structured in two different ways. While the survival benefit—the fund value in case of Ulips and sum assured plus bonuses in case of traditional plans—remains the same, death benefit varies across these structures.

The first variant is a basic child plan that is no different from other insurance-cum-investment products. You pay a premium for a sum assured and the insurer pays the sum assured to the child if the policyholder dies. On maturity, the maturity value is paid to the policyholder.

The second variant is more evolved and popular. The way this is structured makes investing for your child easy. The maturity or survival benefit is the sum assured plus bonuses in case of traditional plans and fund value in case of Ulips, just like the basic variant. What makes it different and a convenient investment product is the way in which the death benefit is paid.

These products are like type II Ulips that pay the sum assured as well as the maturity benefit to the nominee if the policyholder dies. But the two payments are usually staggered. On death of the policyholder, the beneficiary gets the sum assured immediately to fill any financial void that the death of the parent may create. The fund value or the maturity benefit in case of a traditional plan is paid out at the end of the term. This ensures that the sum assured meets immediate financial needs and the maturity corpus takes care of the long-term goal, such as education or marriage, which the policy was supposed to cater.

A crucial feature of these policies is the in-built waiver of premium rider. After paying the sum assured to the child, the insurer waives all future premiums and keeps investing on parents’ behalf for the term at the end of which it pays the maturity value to the child.

Remember that these in-built waiver of premium riders comes at a cost.

Kinds of child plans

It is on these basic skeletons that insurers wrap their product offerings. While a type II Ulip pays the beneficiary the sum assured on death and the fund value on maturity, a traditional plan pays the sum assured twice on death and at maturity.

Insurers are trying to make child plans interesting by bringing variations to this structure. For example, they are staggering maturity benefits to meet important financial milestones of the child. Says Kumar: “Child plans also come with maturity benefits that gets staggered towards the end of the term to ensure than payouts can be used to fund different goals at different points of time. In Ulips, this comes as systematic withdrawals, in case of a traditional plan it is the sum assured plus any accrued bonuses that gets broken down into payouts. In case of death the sum assured is paid and these maturity benefits are paid at regular intervals."

For instance, in the traditional plan space, Aviva India Life Insurance Co. Ltd’s Aviva Young Scholar Secure staggers the maturity benefits or the sum assured as yearly payout after the child reaches 13 years of age and two lump sum benefits at age of 18 and 21 for higher studies. On death, the policy pays the sum assured twice—once immediately after death—and waives subsequent premiums. The second tranche of sum assured is staggered to give benefits of yearly payouts and two lump sum benefits.

Bharti AXA Life’s Future Champs, also a traditional plan, pays the sum assured twice—immediately after death and again with bonuses as yearly payouts.

In the Ulips space, too, there are products that go beyond the usual type II structure. For instance, Max New York Life Insurance Co. Ltd’s Max New York Life Shiksha Plus II pays the sum assured to the child immediately after death and all future premiums are waived. The fund value is then paid on maturity to the child for higher education. However, in the interim, the policy also pays 10% of the sum assured every year till the maturity of the policy. This 10% is basically meant to provide for school expenses. But this extra benefit comes at a cost which gets reflected in the net yield. We did a quick comparison of child plans and found Shiksha Plus yielded lower than some of its peers.

HDFC Standard Life Insurance Co. Ltd, on the other hand, offers Young Star Super Premium which is again a type II product. While on death, the policy pays the sum assured and waives future premiums, it invests 50% of the future premiums and gives the beneficiary the remaining 50% as regular payouts.

How good are child plans

In the traditional space, type II policies offer convenience but the biggest trade off is returns. A typical traditional plan invests very little in equities and hence the returns are minimal.

Says Suresh Agarwal, executive vice-president, Kotak Life Insurance Co. Ltd: “Traditional plans, typically, give out bonuses in addition to the sum assured as maturity benefits. These bonuses which may seem as high as 7-8% are usually added as simple interest. On a compounded annual growth rate, it comes to about 5%. However, traditional plans are good for those seeking safety of investments."

This is a trade off that you can’t ignore when investing for your child’s future. Says Veer Sardesai, Pune-based financial planner: “When you are investing for your child, you are investing for the long term. Over the long term, you need to ensure that your investments are able to beat inflation. Hence equity exposure is necessary. We don’t recommend traditional plans as their long-term returns don’t beat inflation."

If you are one seeking a safe portfolio, you are better off investing in a Public Provident Fund (PPF) that gives a post-tax rate of 8%. Says Deepak Yohannan, CEO, Myinsuranceclub.in: “One can look at buying a term plan and investing the difference in a PPF for better returns."

A traditional plan can be avoided if you are willing to structure the investment portfolio yourself by buying a combination of a term plan and PPF.

In the long run, Ulips tend to give better returns and the current guidelines have capped the costs at 2.25%. You can consider a Ulip if you are buying it when the child is very young, preferably less than six years. Go for a plain type II Ulip and stay invested till maturity.

Watch this space for product cracks on child Ulips over the next few weeks.

Graphic by Shyamal Banerjee/Mint