Insure their dreams

As a parent, securing your child’s financial—and her life perhaps—is top priority. Help is around with life insurers offering products that meet both the goals. These target-oriented plans are suitably tailored for your child’s education and her marriage. But like all other insurance products, finding the balance between costs and returns is not easy. Can you plan for your child without these insurance products? Should you cover the life of your child? Are these products good enough?

N. Chidambaram certainly seems to think so. The 29-year-old executive with Reliance Entertainment has signed up two plans for his son, now two years old. The first is an exclusive children’s plan, LIC’s Komal Jeevan, with payouts after age 18 that will account for his son’s higher education needs. The second is a 10-year ULIP plan, not a pure child plan, which will take care of additional expensive extracurricular activities. Chidambaram feels that with his ULIP investment of Rs 20,000 a year, having a sum-assured of Rs 2.5 lakh, he will secure his child’s all important schooling costs.

Safety check Six things to watch out for before you buy children’s insurance.

Decide if you need a traditional plan or a ULIP plan. Traditional plans work best when your kid is young, or for handicapped children Go for traditional policies which cover parents rather than the child. Returns on investments in traditional plans are low If you have started late with a child plan (that is the child is above five years), a ULIP plan could work better. A ULIP plan weighted in favour of equity can do better than a traditional plan Insurance policies have different paybacks and premium waiver conditions on maturity and death. Read policy documents carefully before deciding what you want If you want to retain the corpus, think of other investment avenues. A term insurance plan combined with a mutual fund should work better than a children's plan In a children's policy, your child will pick the final benefits on maturity

Like Chidambaram, you can choose insurance plans depending on your child’s future goals. At 18, a child is usually mid-way through a college when the first financial paybacks come. This can help your kid to enroll for professional courses. Says D. Arulamany, Senior Vice President and Distribution Head, Chola DBS’ Financial Distribution Services: “Insurance policies with appropriate milestones and customised risk cover can be used as instruments to achieve financial goals.”

But buying children’s plans requires a bit of planning on your side. These plans cost more than pure term plans. On the other hand, since these plans need you to make regular investments, it enforces regular savings.

The different plans

There are two types of children’s plans—traditional and ULIPs. Like all insurance plans, traditional plans are tilted towards debt and typically invest about 65 per cent in fixed instruments. The returns reflect the underlying investments, which are usually around 7-10 per cent. “The returns may beat inflation, but not significantly,” says Arulamany.

One plan that scores high is LIC’s Komal Jeevan. Enrolling your child before her first year provides a guaranteed return of Rs 75 per Rs 1,000 sum assured, which works out to a return of 7.5 per cent. Loyalty bonuses are added benefits. When your child reaches 18 years, she gets her first tranche of paybacks, and subsequently further payments at ages 20, 22, 24. Overall, the plan returns around 10 per cent after factoring loyalty additions and bonuses. But signing your kid after the first year will entail you to forego some returns. Your child loses out on the premium paying years and, therefore, some part of guaranteed additions.

For handicapped children, LIC offers among others Jeevan Aadhar. Here the guaranteed addition is Rs 100 for every Rs 1,000 sum assured for each completed policy year, which can continue till the parent turns 65. In case the worst happens, the child gets 20 per cent of the accumulation upfront and the rest is used to purchase an annuity. This ensures your handicapped child gets adequate and regular future income.

The ULIP way

These days, ULIPs, too, are structured towards children’s requirements. Says T.K. Uthappa, Director (Sales-Tied Agency), ING Vysya Life Insurance: “We have a traditional child plan but we introduced a ULIP plan because we saw a good demand.” ULIPs can take a higher equity exposure and, therefore, the returns are better than a pure debtoriented plan. Some ULIPs even offer capital guarantees. “A ULIP with a capital guarantee may be structured, provided the equity exposure is high,” says Arulamany. Also, buyers have the option of switching from equity to debt when the markets turn bearish.

As investing for your child is a long-term plan, ULIPs perhaps make better alternative as they are longterm products. The cost incurred in the initial years pays back in the long term if you factor in switching and fund management costs. Initially, ULIPs may give low returns due to high costs, but as the corpus builds returns pick momentum. This, of course, depends on market conditions.

In a child’s plan, ULIP or otherwise, partial withdrawals are usually not allowed except at predetermined times, which is good for buyers looking at paybacks for the various milestones. Says Sanjay Jain, Head (Marketing), Bajaj Allianz Life Insurance: “These plans ensure your kid gets a corpus when it’s most needed, as the payback begins when the child completes 18 years.” It’s one way to help her sail through and stand on her financial feet.

Funding their future

Children’s insurance plans come in traditional and ULIP flavours, so choose carefully.

Plan: LIC’s Komal Jeevan (traditional)
Premium: Rs 44,115
Benefits: Guaranteed additions of Rs 75 per Rs 1,000 sum assured every year; plus loyalty addition of Rs 1.5 lakh. Payouts made at age 18, 20, 22, 24 years Single premium option available

Plan: Jeevan Vishwas (traditional plan for handicapped dependents)
Premium: Rs 37,000
Benefits: Guaranteed additions of Rs 60 per Rs 1,000; lifetime insurance cover for purchaser; dependent receives benefits partly as lump-sum and partly annuity

Plan: HDFC Children’s Double Benefit (traditional)
Premium: Rs 33,855
Benefits: If parent or policyholder dies, sum assured gets paid. However, policy continues for the remaining period and maturity benefits equal to sum assured plus bonuses are paid to child

Plan: HDFC Accelerated Benefit (traditional)
Premium: Rs 32,905
Benefits: Policy terminates on death of policyholder and sum assured plus bonuses paid out

Plan: Bajaj Allianz ChildGain 24 plus (traditional)
Premium: Rs 38,531
Benefits: Guaranteed payout of 115 per cent of sum assured; payout at ages 18, 20, 22, 24

Plan: HDFC Young Star Plus (ULIP)
Premium: Rs 12,500 (annual premium multiplier of 40 times)
Benefits: Sum assured is paid when policyholder dies, but future premiums are waived

Plan: ING Vysya’s Creating Star (ULIP)
Premium: Maximum premium payable is Rs 50,000 (while maximum sum assured is Rs 4.5 lakh)
Benefits: Payouts happen for three years after the premium paying term gets over

Plan: Bajaj Allianz UnitGain Plus Gold (ULIP)
Premium: Rs 12,500
Benefits: Sum assured is calculated at a premium multiplier of half the policy term chosen

Example of a 35-year-old man with a three-year-old child; sum assured of Rs 5 lakh and term 15 years