Most of the life insurance companies in India have at least one child care plan , if not more. Almost all the insurance companies spend lion's share of their advertising budget on promoting their respective child plans inspite of the fact that child plan is just one of the many life insurance products they have. HDFC Standard Life Insurance Company has positioned itself as premier life insurance company in the child care plan category. Almost all of its advertising communication is based on this premise. The reason why insurance companies promote their child plans heavily in India, is because of the fact that child care is an "emotional issue" for most of the parents in India, as much as its a financial issue . Most of the parents feel emotionally obliged to plan for their kid and this is where insurance companies hope to make a mark via their advertising. Nothing wrong in doing so. The question to be asked is whether or not these child insurance plans are good enough ? Do they really meet the parents expectation ? Are they really the best way one can plan for his/her child's future?
What is a Child Insurance Plan? Child Insurance plans are a type of insurance plan where the insurance company promises to provide a predetermined sum of money (in case of traditional plan) or percentage of the corpus(ULIP) at a predefined intervals to the policyholder. Along with this it also provides life insurance to the proposer with an option of premium waiver upon the death of the proposer (parent). There are primarily 2 types of child plans prevalent in India
1. Traditional Child Plans
2. Unit Linked Child Plans
1. Traditional Child Plans - These are like a normal endowment plans where the policy holder gets a predefined sum of money at regular intervals. For example, the policyholder might get 20% of sum assured when the child is in Std Xth, 25% when he is Std XIIth , 30% during graduation and remaining during PG. Upon death of the person paying the premium, the premium waiver option is activated and the plan continues without paying any premium. The survivor also gets the sum assured.
2. Unit Linked Child Plans - Under these plans, the payout is dependent on the funds performance. If the fund does well, the money payout is more whereas if the fund does not do well , then the payout would be less. The payout is generally defined in percentage terms of the fund value . The payout, here too, is periodically made like a traditional plan. The insurance and premium waiver facility too applies here.
Analysis of Child Plans
Lets analyse the child plans on basis of the following important parameters:-
1. Life Cover - Both the traditional and ULIP child plans need to have atleast a life cover as defined below
Sum Assured = Term * Annual premium / 2
2. Investments - In traditional plans , the money paid as premium is mostly invested in debt and money market instruments which are considered safe. They are generally not invested in equities and this is why the returns in these plans are guaranteed.
In case of ULIP based child plans, the fund is invested as per the policyholders wish . It can be invested in debt,equity or both depending upon the mandate received by the policyholder. The returns are dependent on the fund's market performance and is not guaranteed.
3. Returns - The returns of traditional endowment plan is very low at 5-6% pa whereas the returns in a ULIP is marginally higher at 7-9% pa. These are very low rate of returns for a product of such a long gestation period.
4. Flexibility of premature withdrawal - Most of these plans do not allow the flexibility of premature withdrawal at any time during the plan. Some plans do it but have restrictions on the number of times one can withdraw.
5. Cost structure - Both these plans have very high upfront cost structure. Some of these funds can eat away anywhere between 20% to 60% of your premium for first few years as charges.
Shortcomings of these Child Plans
1. These plans have a very high cost structure . They are the most costly investment tool from that perspective. Compare the cost structure of these plans which charge upto 60% of the first year premium as charges with a well diversified mutual fund which charges only 2.25% of the money invested as charges. The difference is too huge to be ignored.
2. Inadequate Life Cover - These plans also do not provide adequate life cover to the insured. One needs to have atleast 10 times of his/her annual income as life cover (Sum Assured) which can be met by taking a standalone term insurance plan, which is the best and the cheapest insurance plan one can ever take.
3. Poor Returns - The first and foremost reason , why one invests in these plans is to get a good return over his investment so that he can pay for all the expenses for his child's education , marriage etc. But, these plans fail you in this department big time. They give you a paltry return of 7-8% pa when you can easily get 12-15% pa returns on any well diversified equity mutual fund. Add to this the low cost structure of mutual funds, they will beat the returns of these plans by a huge margin. This alone should be enough for you to shun these plans.
4. Flexibility - The mutual funds provide unmatched liquidity and flexibility. One can withdraw the money at anytime he/she wishes unlike in the child plans where the payout is at defined stages. One can have an emergency anytime and as such , the flexibility of being able to use money is very important.
So whats the Final Verdict? The final conclusion is that investing in child plans is a big NO NO for me. Why would you invest in a plan which robs you of 60% of your money in the name of charges alone in the first year. Subsequent years too they keep eating away your money in the name of charges and give you paltry returns. Do not fall in the trap laid out by insurance companies. If you want to plan for your child then I suggest you should go in for a pure term plan and a well diversified equity mutual fund. Take term plan where the life cover is atleast 10 times your annual income and have 2 or 3 5 star rated(morningstar ratings) mutual funds . With this strategy you will always beat the returns that any of the child plans being sold by the insurance companies in the market. Remember one thing - Insurance companies are there to sell insurance policies not investment policies. Buy insurance from them not invest with them.