Traditional child plans aren't best choice

The income option for death payout is useful but one should seek lower cover so that more amount can be invested

Parents often worry if they are saving enough for their children’s future. Given the spiraling cost of education, among other things, there is always the fear of inadequate savings. But, should you buy a product, a traditional insurance child plan, that offers less than even fixed deposit rates to meet this expense?

Most financial planners will say no to such a product. And for a good reason. Real rates of returns (nominal rate of returns minus consumer price index) turned positive for both debt and equity in FY14 for the first time in five years. And, the cost of education is rising much faster than the CPI.

Child insurance plans can be useful in other ways. “In case of a parent’s untimely death, all savings will go to his heirs immediately. If at that time his child is say, 10 years old, then funds for the child’s higher education will be required only after another eight years. In this intervening period, his spouse may be expected to manage the funds wisely till the child comes of age, but there is no guarantee that the funds will be available eight years later, when the need arises,” says Manoranjan Sahoo, chief agency officer, Reliance Life Insurance.

Reliance Life Insurance has recently launched Reliance Education plan, a non-linked non-participating plan which offers the income option. Even Life Insurance Corporation of India (LIC) has launched Jeevan Tarun — a participating non-linked limited premium payment plan. The plan offers waiver of premium in case of death of parent as an additional rider while in case of Reliance it is an inbuilt feature.

There are other interesting options such as, staggered payment as well. Reliance’s plan also offers the option to take part of the death benefit as a lump sum and part as income for up to 10 years. Fifty per cent is paid out as an immediate lump sum along with an annual income of 12.94 per cent of the remaining amount over a period of 10 years. Other companies that offer the staggered option on child plans include Religare Life Insurance, Exide Life Insurance and Aviva Life Insurance.

“Insurance companies are pushing the staggered payment option because there is an audience that is asking for it. Here, there is a certainty of income spread out over a period of time is a good thing” says Deepak Yohanan, chief executive officer (CEO), Myinsurancecblub.com.

While these two recently-launched products are traditional plans, there are Ulip-based plans as well. The risk is higher since the investment is linked to markets, but returns will also be higher. In guaranteed plans, the risk lies with the company. Annual returns are usually six to eight per cent, close to fixed deposit rates, points out Naval Goel, Founder and CEO, PolicyX.com.

In the Reliance Education Plan, if you pay a premium of Rs 1 lakh for 10 years, the corpus that will come to you after 20 years is Rs 18.6 lakh. This works out to a return of only four per cent, which is lower than what a bank fixed deposit offers. Returns from child plans are lower than savings plan because of the high protection component in the plan.

No wonder, Yohanan feels that ideally a child plan should be viewed as an investment plan and hence, it is not advisable to go for one with higher cover. Over a 15-20 year period, equity mutual funds and even debt instruments will beat these products substantially. However, depending on the parent’s age, one can buy a plan, in addition to equities and debt, to counter any uncertainty.