Since life cover is not meant for children, parents should opt for MFs or FDs.
Remember Aviva Life Insurance's television commercial? Where Sachin Tendulkar says, “Mein bhi ek pita hoon, aur mein yeh samajhta hoon.” The message was, when it comes to educating one's children, even the world's greatest cricketer is just another concerned parent.
And it's not just fathers, insurance companies are even promoting these plans to grandparents. The sales pitch: Gift for grandchildren. At present, there are 16 unit-linked children plans and five traditional child plans in the market. The latest entrants are Max New York Life Insurance and Bharti AXA Life Insurance, who launched their unit-linked child plans last month.
Max New York Life's Shiksha Plus allows the policyholder to cover two children. After the second child, the parent can increase the premium by 50 per cent and the sum assured rises accordingly.
Children plans are of two types, traditional and unit-linked plans (Ulips). Traditional plans offer a fixed return, either at maturity or in small amounts at fixed intervals (money back policies). Ulips provide both investment and life cover benefits.
As for unit-linked child plans, there are two types. First, covers the child's life only after the age of seven years. A child can be insured, experts say, as early as 90 days from his/her birth. The advantage: The earlier one starts, the lower the risk and higher the investment period.
The second one covers the policy proposer. However, most insurers don’t cover grandparents, though parents can be insured. The premiums for the former can be very high.
When the cover is on the parent, one should always opt for a premium waiver rider. This results in the waiving of future premium in case of the parent's death during the policy's tenure.
Experts say, if one chooses to buy a child plan, insuring the child makes more sense. “Insure the child, as you will get the benefit of low mortality charges due to low mortality risk,” says Rahul Aggarwal, chief executive officer, Optima Insurance Brokers.
Let us look at some of the costs involved with a child plan. A policy for a 10-year old, premium Rs 19,999 for 25 years, has high allocation charges. The sum assured, in case of Ulips, can range from 5-100 times the premium, depending on the insured's age and health condition and financial strength. Experts say if the sum assured is less than five times the premium, the maturity amount becomes taxable.
The premium allocation charge ranges from 4-45 per cent on the first year premium and reduces from the second year onwards. For example, LIC's Child Fortune Plus SP levies a 4.25 per cent allocation charge in only the first year. Reliance Life's Super Invest Assure Basic Plan attracts 45 per cent charge in the first year, lowered to five per cent each in the second, third and fourth year, respectively.
The administrative charge here ranges from Rs 25-75 per month. Sahara Life's Sahara Ankur RP charges Rs 25, whereas Aegon Religare Life Insurance's Star Child Plan RP attracts Rs 75 per month. Some companies charge a policy administrative charge as a percentage of the premium or sum assured, and this can be a significant amount.
Once these charges are deducted, the remaining amount is invested in mutual funds of your choice. These can be 100 per cent debt or equity or a mix of both, depending on the policyholder's risk profile. Here, there is an additional fund management fee, which ranges from 0.5-1.35 per cent. LIC and Aegon Religare charge a fund management fee of 0.5-0.8 per cent. Birla Sun Life Insurance and Bharti AXA Life Insurance levy 1-1.35 per cent as fund management fee.
Apart from these costs, insurance companies charge a mortality fee on the sum assured, which depends on the age of the life assured.
However, such plans do not provide cover to children below the age of seven, hence, there is no mortality charge levied. “The mortality charge increases from the age of seven till 14. Then, it starts decreasing till age 20, after which it starts increasing, again,” said an insurance agent.
“Investors here do not know they can ask for child plans with much less administrative, allocation and fund management charges - may be where only 10-12 per cent of the amount invested goes towards such charges,” added the agent. However, industry experts do not advise taking up such plans for grandchildren. “Since a child has no dependents, buying a plan for him/her makes no sense. Also, for a parent, loss of a child cannot be compensated by money,” said another insurance agent.
Instead, experts advise buying mutual fund units in the child's name or putting away money in fixed deposits. Even at 10 per cent annual returns, the corpus would be significant.