The Hindu Business Line : Unit-linked child plans

IN CONTINUATION of our coverage on child plans, this week we will discuss unit-linked child plans and how they compare against a money-back or endowment child policy.

Currently, Aviva, Birla Sun Life and ICICI Pru offer unit-linked child plans. A unit-linked child plan works differently from a money back or endowment plan.

A unit-linked plan works on a minimum premium basis and not on a sum assured one. You decide the amount you can contribute at regular intervals.

The insurance cover is a multiple of the premiums paid. You also have the choice of a higher or lower cover. If you choose a lower cover, risk expenses deducted are lower and, hence, your savings component higher.

Investment options

The premiums paid are invested in various fund options depending on your risk preference after deducting mortality expenses and other charges. Aviva has two fund options: With-profit fund and unit-linked fund. In the former, the fund's unit value does not decrease. (You also have to make the choice at the outset and cannot spread your investments under both the funds.)

Birla Sun Life and ICICI Pru have three investment options: One with a higher equity component, a balanced fund and a conservative fund with a higher tilt towards government securities and debt instruments. They operate similarly.

Top-ups

Apart from your regular contributions, you can also make additional payments to increase the savings component. These top-ups do not affect the sum insured. The top-ups are also subject to a management and surrender charge if you withdraw them before a specific period (say three-four years).

Switches

ICICI Pru and Birla Sun Life allows you to switch between various fund options. For instance, ICICI Pru allows one free switch per annum; further switches are charged at 1 per cent of the amount switched. (Aviva does not allow you to switch between options).

Benefits

There is a subtle difference between insurers in the death benefit paid. In case of Aviva Life there are two options: Either the sum assured and policy value (number of units in the fund multiplied by the unit value) is paid to the nominee and the policy terminates, or you can purchase units for the sum assured and the fund continues to earn returns.

ICICI Pru pays the sum assured, waives future premiums and withdrawals can be made in future as per the terms of the plan. In other words, apart from the lumpsum payment on death, future premiums net of charges (to be borne by the insurer) continue to go into the fund and increase savings even after death.

In the case of Birla Sun Life, the sum assured and policy value is paid on death and the policy terminates. But if you choose a waiver of premium rider at extra cost, the policy continues as if the premiums are being paid.

On maturity, you get the accumulated value in the fund. Aviva also allows you to maintain the account for five years after the policy's maturity. No risk cover is provided during this period but the policy continues to earn returns.

Unit linked vs other child plans

A unit-linked plan offers you the benefit of market-linked returns. If interest rates go up, then you may get a better return. On the downside, the value of your investments may erode if the market turns bearish and interest rates fall.

Market-linked plans also give the flexibility of withdrawals at any time after a specific lock-in period (between three and five years). There is a limit on the number of withdrawals per annum and a maximum cap on the amount withdrawn.

For instance, Birla Sun Life allows two free withdrawals per annum and the rest are charged at Rs 100 per withdrawal.

Endowment plans and money-back plans tie you down to a specific payout structure. Hence, the plan may not come in handy during emergencies.

The risk involved in a market-linked plan is high. Except for Birla Sun Life, which offers a guaranteed 3 per cent return on investment after deduction of charges and Aviva's `with profit fund', which protects against erosion of investments, others do not guarantee returns. The downside risk does not exist in non-market-linked plans. Some players such as the LIC, SBI and MetLife also offer guaranteed additions.

The charges in a unit-linked plan are high. Apart from a regular deduction ranging from 1 per cent to 5 per cent on premiums paid, you also have to pay administration charges, processing fees and annual investment charges.

These could reduce the quantum of returns on your investments. Also, the charges can be hiked in future, subject to a maximum limit, making it more risky.

The risk premium for unit-linked plans is charged on a one-year renewal basis. In other words, your premium deduction for risk increases year-on-year according to the age of the insuree. Effectively, this could reduce your savings component. In money-back or endowment plans, you are locked in for a constant risk premium.

The minimum contribution limit is high. For instance it is Rs 18,000 for ICICI Pru. This also makes the policy less affordable.

Which one's right for you?

If you are looking for a long life cover and also returns, LIC's polices will serve the purpose. LIC's Jeevan Balya and Jeevan Kishore give you the longest term of 50 and 35 years respectively. Jeevan Balya is also an affordable policy with a low premium.

If you look at comparative returns, LIC's Komal Jeevan and MetLife's Junior Money-Back Plan gives you competitive returns at over 5 per cent. Moreover, the returns are guaranteed.

Met Life's money back plan gives a guaranteed addition of Rs 100 per Rs 1,000 sum assured and Komal Jeevan pays Rs 75 per Rs 1,000 sum assured annually. For both policies, accumulated bonuses are paid at maturity.

MetLife's non-participating plan for children is also very competitive. It is not only easy to understand, but also gives a competitive return of 5 per cent as bonuses do not accrue for the policy.

If you are looking for low premium payments, then you could take a look at this policy.

LIC's Jeevan Sukanya takes care of the expenses that one incurs at various stages of her (the policy can only be taken on female child) life.

It gives your child a lumpsum at age 20 to meet educational expenses, provides life cover for her life partner and also pays a lumpsum (accumulated bonus) on maturity at age 50 to take care of her retired life. If you are looking for a policy for your girl child and give her protection, then this could be the policy for you.

Among unit-linked plans, Aviva appears to be better positioned, as the charges are lower than that of other policies. Also the minimum contribution requirement is much lower than other polices making it more affordable.

ICICI Pru and Birla Sun Life offer more flexibility in terms of investment choices, switches during the policy term and premium payment. Aviva requires regular premium payment, while ICICI Pru and Birla Sun Life offer more premium payment options.

The charges determine the surplus available for investment and Aviva Life scores over others on this aspect.

Therefore, assuming all the funds generate similar returns on investment, you will have a higher corpus in the case of Aviva.

The investment performance of individual companies will determine the actual returns on the policies. If you have limited knowledge of the market, then you will be better off investing in a non-market linked plan. They are easy to understand, straight forward, and there are no charges except for risk premium deduction.

This is the second and concluding part of the series on child insurance plans. The first part appeared on October 26.

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