Child plans: What your agent didn’t tell you

Insurance agents nowadays use a new ploy to sell endowment policies. “ What if you die? Do you have a plan B for the family?” may come across as rather blunt. So they now pull the emotional trigger, saying — “ If you are not around, who will pay for your child’s education? Don’t you want to secure your child’s future and ensure she becomes a pilot or a doctor?” Which parent wouldn’t capitulate?

Child insurance plans are nothing but endowment insurance policies with an opaque investment book and high agent commission.

The one distinguishing feature of these products is that on the death of the life insured (the parent) before the completion of the policy term, all future premiums are waived, while the policy continues as the insurance company makes annual contribution towards it. For this benefit, however, these policies charge a high price. If the parent survives the policy term, the returns he/she will earn on the premiums paid through the policy term is very low; it may not even cover inflation. Agents do not always inform customers about the cost structure of child insurance plans, their low returns and alternative options. Here is what you should know.

1. It is a regular endowment plan

Most child insurance plans pushed by agents are traditional endowment plans — a savings+insurance combo product. While they typically do not disclose details of the investment book, they mostly contain debt instruments. Thus, the long-term returns are low — only about 4-5 per cent. The IRR (internal rate of return) may be higher if the parent passes away in the initial years of the policy.

The other point that works against endowment plans is that they are rather pricey. Even if we assume a gross return of 8 per cent, the net return will not be more than 4-5 per cent. Participating plans, which get a share of the profits of the insurance company, may give slightly higher returns as they offer a bonus every year. But, note again that this bonus is not guaranteed. And, if you want to exit the plan within the first five years, you may end up with a capital loss, as costs are front-loaded.

What you should do: For building a portfolio with a long-term goal like child’s education or marriage, a SIP (systematic investment plan) in mutual funds is a better choice as, historically, long-term equity returns are better than debt. That said, don’t put all your eggs in one basket. Split your investment between equity and some fixed income instruments such as FDs, PPF or even Sukanya Samriddhi Yojana, where there is capital safety.

2. There are child ULIPs, too

If it’s a child insurance plan that you want, look for a child ULIP, or unit-linked insurance plan. Here, the investment is in market-linked products and you have a choice between equity, debt, or a mix of the two. The returns in a child plan are important because, with inflation, costs keep escalating and the money you need for his/her education/marriage will be a much higher sum than what it is today. A ULIP may sufficiently handle that. The other advantage of a ULIP over an endowment plan is that the costs are relatively lower. The difference between the gross and net returns may not be more than 2 per cent. However, in ULIPs, the investment is locked for the first five years.

What you should do: One option here is Max Life Shiksha Plus Super, a non-participating ULIP that offers you six fund choices. You can also opt for a dynamic investment strategy, wherein, in the early part of the policy term, the premium goes into an equity fund and, as the policy term progresses, the investment is shifted to a conservative fund with significant debt allocation. HDFC SL YoungStar Super Premium is also a child ULIP which comes with four investment options; you can even choose HDFC Life Click 2 Wealth with the premium waiver option.

3. Some insurers cover the life of the child

There are child plans that cover the life of the child and pay the parent, the nominee, on the death of the child. A case in point could be LIC’s New Children Money Back Plan. Given that the very premise of life insurance is to cover the financial liability to a dependant when a breadwinner passes away, there is no reason why a child who is not earning has to be covered for his/her life.

What you should do: When you buy a child insurance plan, the objective is to save money in a disciplined manner over 15-20 years and hand over a lump-sum to the child. So, look for insurance plans that cover the life of the parent.

4.The sum assured could be low

Since child plans are endowment insurance covers, the death benefit offered is 10 times the annualised premium, or 105 per cent of the premiums paid till then, whichever is higher. So, you can’t rest on this plan to take care of your family when you are not around. Even if you pay ₹1 lakh as premium annually on a child plan, you will get a cover of only say ₹10 lakh, which may not sufficiently cover all the needs of your family.

What you should do: Take a term insurance cover. The thumb rule is take a cover for 20 times the annual income. In a term insurance cover, for a ₹1-crore SA policy, the premium for a 35-year male will be around ₹20,000.

5. No flexibility in payout

Not all child plans give the policyholder the flexibility to decide when he/she wants the benefit payments (at maturity) made to the child. For instance, in SBI Life Insurance’s Smart Champ Insurance, the benefit payouts compulsorily start from the age of 18 and are made in four equal annual instalments. So, you cannot decide that the full benefit of the plan should go the child at, say, 21 years. In Bajaj Allianz Life’s Young Assure, too, you can’t give the full maturity proceeds as a lump-sum to the child. You can only give it in 3/5/7 instalments after the policy period, which is 10/15/20 years.

What you should do: Some child plans offer flexibility. Take, for instance, the Max Life Future Genius Education Plan, which is a traditional child plan. Here, you can have the benefit payments start at the age of 16, 18 or 21 — when the child enters high school or college, or completes his/her graduation. You have the flexibility to choose a policy term between 13 and 21 years. Max Life Shiksha Super Plus also offers flexibility in choosing the payout term.

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