A wise mother once said, "Your child will keep building castles in the air; you better start buying bricks for the castle today." And how do you buy those bricks?

Introducing Child Plans. It is an insurance product with an opportunity to invest and save taxes, all at the same time.

Have you heard of them? Aren’t they great? Most Child Plans offer:

 

• Waiver of premium in case of an unfortunate event—the insurance company would be paying the premiums in your absence till the time span of the policy
• It offers a Life Cover to the beneficiary on the death of the proposer,
• Maturity proceeds once the policy matures on the scheduled time and
• Tax Benefits

 

If you still don’t believe it, here’s what Exide Life’s Wealth Maxima for Child’s Future Plan states, “In case of an unfortunate event, an amount equal to the Life Cover is paid to the beneficiary. In addition, all future premiums are funded by Exide Life Insurance on your behalf. This way the plan continues for the full policy term and on maturity the fund value is paid to the beneficiary”.

Aren’t they better than Term Insurance Plans?

In case of Child Plans, the policy continues even after the death of the proposer. Moreover, the beneficiary earns maturity proceeds unlike a term insurance policy. Here’s a snapshot:

 

Scenario	Term Plan	Child Plan
In case the Policy Holder dies	Death benefit is paid and the policy is automatically terminated.	Death benefit is paid but the policy continues. The Waiver of Premium rider is automatically triggered and the insurer pays rest of the premiums.
In case the Policy Holder survives	There are no Maturity Benefit	The Maturity Benefit depends upon the type of policy chosen.

(Source: PersonalFN Research)  

You can either choose a Child Plan which is market linked (ULIP) further giving you an opportunity to choose from its various schemes (e.g.: Exide Life’s Wealth Maxima for Child’s Future Plan offers 6 schemes to choose from) or a non-market linked plan (mostly an endowment plan) guaranteeing the amount assured on maturity.

Let’s understand the concept with the help of a mini case study.

Mr. XYZ buys a non-market linked Child Plan for a 10 year period with a sum assured of Rs. 20 lakh and a maturity proceeds of Rs. 15 lakhs. If: -

 

Scenario		Death Benefit (Rs)	Will the policy continue?	Maturity Proceeds (Rs)
I	Mr. XYZ survives the 10 year policy period	NA	NA	15,00,000
II	Mr. XYZ passes away after 4 years of paying the premiums	20,00,000	Yes. The Waiver of Premium rider will automatically get triggered and the insurance company will pay the premiums for the remaining 6 years	15,00,000

(Source: PersonalFN Research)  

So what do you think? Should you buy a Child Plan? It offers everything that you have always looked for in an investment. It is a perfect mix of investments, insurance and taxes? Isn’t it?

When you consider investing in a Child Plan, make sure you account the Internal Rate of Return (IRR). It highlights the returns expected on an investment based on the amount of premiums paid. After all, isn’t earning good returns a key to guarantee your child’s future?

The irony is most individuals fall for the tall claims of their advisor and his projections that promise them the world. Most insurance products which come with savings option offer paltry returns, i.e. between 3 to 6% p.a.

Is that all you expect from an investment, when you invest for over 10 years?

The annual premium for a 30-year-old planning to purchase a 20 year Child Plan (HDFC Life’s YoungStar Udaan Plan) with a premium paying term of 15 years for a Sum Assured of Rs 20,00,000 comes to Rs 1,77,161! Isn’t that too high? Would you be left with an investable surplus to meet other financial goals like buying a house, planning for retirement, vacation and marriage, etc.?

Is there any way out? How can you balance paying for all your financial goals? We think you can, here’s how...

Purchase a term insurance plan and invest the balance in an asset mix of equity, debt and gold. It can’t get simpler than this.

Still confused? Let’s work with some numbers...

 

Particulars	Amount	Explanation
Annual Premium under a Child Plan (as calculated above)	1,77,161	HDFC Life's YoungStar Udaan Plan for a 30 year old, for a 20 year plan with a Sum Assured of Rs 20,00,000 and a premium paying term of 15 years
Less: Annual Premium under a Term Insurance policy	12,450	HDFC Life's Click2Protect Plan for a 30 year old paying regular premium with a Sum Assured of Rs 1 Crore with a policy term of 30 years
Annual Net Premium	1,64,711	Premium available for investments

(Note: The above table is for illustration purpose only)
(Source: PersonalFN Research)  

The annual net premium should be distributed according to the timeline of one’s goals amongst equity, debt, and gold. Assuming the corpus would be required after 20 years, we have allocated 80% of the premiums to equity and the balance, equally, between debt and gold.

 

Particulars	Equity (80%)	Debt (10%)	Gold (10%)	Total
Annual Net Premium distributed	1,31,769	16,471	16,471	1,64,711
Assumed Growth Rate	12%	8%	6%
Future Value after 20 years	94,94,264	7,53,750	6,05,895	1,08,53,909
Compounded Annual Growth Rate (CAGR)				11%

(Note: The above table is for illustration purpose only)
(Source: PersonalFN Research)  

You see, a Child Plan would have helped you earn a paltry sum of Rs 20 lakhs after 20 years vis-a-vis our strategy, which helps you accumulate Rs 1.08 Crore.

This strategy not only helps you to be adequately insured, but also helps accumulate for other important financial goals.

What is your strategy for your child’s future ? Does it fall in line with what we’ve discussed or do you have a different approach? Write to us.

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