Child insurance plans in India

Thursday, March 10, 2011, 12:22 by Business Editor

We compare four child insurance plans from HDFC, Aviva, Kotak and LIC

How much does it cost today to pursue a 2-year MBA course at a leading management school in India? At least, Rs. 3,00,000. While this figure is well beyond the realms of affordability for most parents in this country, there are more than a few well-off middle-class families who can realistically hope to meet this overhead.

However, things could well take a turn for the worse in the coming years, considering the rise of inflation. Some studies indicate that you would have to have a corpus of about Rs. 9,07,000 to bankroll your child’s MBA degree in 20 years’ time–that’s more than thrice the current expenses! And if you are not financially prepared, your beloved child may miss out on that dream opportunity of a lifetime.

With the soaring cost of education at every level–ask those parents having to fork out crazy amounts of money to get their kids admitted to private English-medium schools in the metros–it’s a no-brainer, then, that child insurance plans are becoming increasingly popular today.

So what exactly is a child plan, or children plan? Basically, it is a kind of life insurance scheme (life cover for the parent, usually) intended at addressing the growing educational and other financial requirements of children.

In return for paying a lump-sum amount or regular premiums, the child insurance policy provides an assured sum of money on maturity (when your child becomes a major) to cover his higher study-related expenses.

And that’s not all, a child plan can also be designed to plan for children’s life-changing events such as their marriages.

We have shortlisted herewith four child plans currently available in India that should help you get a clear sense of how to start planning early in order to make your child’s dreams come true.

Aviva’s child insurance plans

Aviva Young Scholar Advantage

The ‘Young Scholar Advantage’ plan from UK insurance giant Aviva is a unit-linked regular premium payment scheme with an entry age of 21-50 years for parents who want a life cover for themselves. The plan is valid for child nominees (beneficiaries) aged between 0-17 years.

Policy details

One can select anything between 10-25 years to decide on the Policy Term (PT), with the maximum maturity age for the parent set at 70 years.

As far as the ‘Premium Payment Term (PPT)’ is concerned, this can be either 5 years or equal to the Policy Term. The computation of the premium amount is done accordingly, with annual minimum premium defined at Rs. 20,000 (no cap for maximum payout) if PPT equals PT. On the other hand, the minimum premium figure shoots up to Rs. 1,00,000 if PPT is 5 years. One has to shell out a Top-up Premium of Rs. 5,000 at least annually.

The policy owner can pay premiums in various modes, either once a year, or every six months or even on a monthly basis.

The minimum ‘Sum Assured’ (S.A.) figure is calculated as 10 times the annual premium, whichever is higher.

Investment options

As we told you earlier, the ‘Young Scholar Advantage’ scheme is an insurance-cum-investment plan. Hence, it gives you the choice of selecting any one of 8 unit-linked funds–Balanced Fund II, Bond Fund II, Enhancer Fund II, Growth Fund II, Index Fund II, Infrastructure Fund, Protector Fund II and PSU Fund–where a portion of the plan corpus will get invested.

And there are two ways–Systematic Transfer Plan and Automatic Asset Allocation–through which the policyholders can allocate capital for investments.

While taking a call on which fund to go in for, please factor in your risk appetite, age, expectations in terms of returns, etc. E.g. a parent in his mid-30s to early 40s will be better off not going in for an all-out equities (read, high risk) exposure, whereas a young married guy in his late 20s can be aggressive in terms of investing in stock markets.

Policy highlights

Here are some of the salient features of this child insurance policy –
Death Benefit (In the event of the unfortunate death of the insured parent)

1.    Aviva will pay Sum Assured to address the child’s immediate financial concerns.

2.    The company will also foot the bill for paying all the subsequent premiums, excluding rider premium into the deceased individual’s fund, ensuring that the corpus the parent planned for is available to his child even after his death.

3.    The policy will continue with all the investment benefits intact for the kid till maturity.

Loyalty Addition

1.    Insured parents are entitled to Loyalty Additions, subject to them continuously paying all due premiums.

2.    At the end of year 11, the Loyalty addition will be 1.5% of Fund Value with regard to regular premiums. For the subsequent years of the policy term, the additions will be made at the end of every following 2nd policy year till the lapse of the PT.

3.    Loyalty Additions will be added even after the demise of the insured parent.

Maturity Benefit

1.    On maturity, the policy owner will receive the Fund Value with regard to both regular premiums and Top-up premiums, apart from accrued Loyalty Additions, if any as on the maturity date. The Nominee (read, the child) will be eligible for this Maturity Benefit in case of death of the insured parent prior to maturity.

2.    A so-called ‘Settlement option’, which can be opted for at maturity, enables the policyholder to keep the money invested in the fund even after maturity, ensuring that the sponsor gets the same systematically over a period of 1 to 5 years.

Riders – For the uninitiated, riders are additional components of an insurance plan that expand or restrict the benefits which are otherwise payable, thereby giving you a flexibility to alter the scope of the original policy’s coverage.

The ‘Young Scholar Advantage’ plan provides the following three riders –

Child Education Rider

Aviva will pay a certain monthly figure, as decided by the insured parent during inception, throughout the Policy Term to facilitate an uninterrupted education of the child in case of the parent’s death.

Comprehensive Health Benefit Rider

The insurer pays the Sum Assured immediately when the parent suffers from a crippling disability or a defined critical illness. Plus, Aviva will waive off future premiums, taking on the responsibility of paying all remaining dues as a lump-sum amount into the fund. This makes sure that the policy continues unabated, with investment benefits in place.

Term Plus Rider

An ‘Aviva Term Plus Rider’, if selected by the policy owner during purchasing the plan, makes it mandatory for the company to pay an extra fixed amount in the event of the parent’s death.

Tax benefits-  The insured parent can avail of tax benefits under Section 80 C of the Income Tax Act, which allows premiums up to Rs. 1,00,000 to be deducted from taxable income. Moreover, Maturity and Death Benefits are exempt from taxes, as per SEC 10 (10)D of the same Act.

Limitations – The ‘Young Scholar Advantage’ plan from Aviva allows complete withdrawal only after 5 policy years.

HDFC’s child insurance plans

HDFC Life Children’s Plan

The Children’s Plan from HDFC Life has a minimum entry age of 18 years, with parents aged up to 60 years allowed to subscribe to the scheme (maximum maturity age set at 75 years). The Policy Term ranges from 10 to 25 years.

Premium

The following table outlines the indicative premiums for a insured male parent paying annual premiums for a Rs. 5,00,000 Sum Assured policy, with the plan having a 20-year term (assuming, the child is currently 1-year old).

Age of parent (years) Accelerated Benefit Plan Maturity Benefit Plan Double Benefit plan
30 23,575 22,690 24,085
35 24,045 22,820 24,790
40 24,890 23,055 26,005

You can decide from any of the three frequency modes–quarterly, half-yearly, annually–to pay the premium.

Bonuses

One key aspect of the Children’s Plan is its ‘Bonus’ component, involving two parts – the Revisionary Bonus and the Terminal Bonus.

The Revisionary Bonus is typically calculated as a percentage of the basic Sum Assured of the insured parents’ policy, taking into account multiple factors such as a long-term horizon for investment returns, expenses, mortality, etc. Once added to the plan, HDFC Life is committed to paying this bonus either on death or maturity (depending on which plan option you select; more on that a bit later).

On the other hand, the Terminal Bonus, at time, is added to a policy on maturity, wherein the company awards the policy owner a slice of the ‘With Profits’ fund.
Policy options

The Children’s Plan is based on the Beneficiary concept, wherein the policy nominee (child) is the solitary individual entitled to the benefit under the scheme. In order to help you create a bespoke plan for your beloved one, HDFC Life offers the following three options to choose from.

Plan options Death benefit (On demise of insured parent during the policy term) Maturity benefit
Accelerated Benefit Plan 1.      The company will pay the Sum Assured along with Bonuses Declared

2.      Policy ceases to exist with immediate effect

The insurer will pay the Sum Assured plus Bonuses Declared
Maturity Benefit Plan The insurer pays all subsequent premiums and policy continues uninterrupted The company will pay the Sum Assured plus Bonuses Declared
Double Benefit plan 1.      HDFC Life will pay the Sum Assured

2.      The deceased parent’s family need not pay any additional premiums and policy continues

The insurer will pay the Sum Assured plus Bonuses Declared

Tax benefits – As per Section 80 C of the Income Tax Act, 1961, the policyholder can save as much as Rs. 33,990 since premiums up to Rs. 1,00,000 are permitted as deduction from taxable income. Plus, Sec 10 (10)D of the given Act waives Maturity and Death Benefits from the purview of taxes.

Limitations – The Children’s Plan from HDFC Life has a 3-year lock-in period. In case of early surrender of policy after 3 years, you have to fork out a guaranteed minimum surrender value (50% of all premiums paid subsequent to 1st year, excluding any further premium paid for increased mortality risk).

LIC’s child insurance plans

LIC Jeevan Anurag

The ‘Jeevan Anurag’ policy from Life Insurance Corporation Of India, the state-controlled insurance behemoth, can be purchased by a parent on his or her own life. The entry age varies from 20-60 years for a basic plan with maximum maturity age capped at 70 years. However, for a term rider, the entry age stretches from 20 to 50 years.
You can buy the policy for a term of between 10-25 years, with a mandatory Premium Payment Term of 15 years.

While one can calculate the exact premium amount by going to the LIC website (http://www.licindia.in/premium_calculator.htm), here is an indicative figure to give you some sense of what are the costs involved.

For a 31-year-old parent wishing to subscribe to a 20-year policy that involves a PPT of 20 years, the premium figure comes in at Rs. 27,479 in case of annual payment and Rs. 2,456 if he decides to go in for a monthly mode. Other payment routes include half-yearly and quarterly frequency options.

The Sum Assured figure starts at Rs. 50,000, with no upper limit.

Policy highlights

Let’s look at a few highlights of the ‘Jeevan Anurag’ policy –

Guaranteed Benefit

LIC will pay 20% of the Basic Sum Assured at the beginning of every year during last 3 policy years before maturity.

As a case in point, if you have enrolled for a 20-year policy, you will get 20% of the Sum Assured at the end of the 17th, 18th and 19th year.

Maturity Benefits

When the policy matures, the insurer will pay 40% of the Basic Sum Assured, alongside Reversionary Bonuses announced from time to time on full Sum Assured for the full term, and a Terminal Bonus, if any.

Taking the above example, LIC will award 40% of the Sum Assured on top of Reversionary Bonuses and a Terminal Bonus, as applicable, at the end of the 20th year.

Death Benefit
‘Jeevan Anurag’ also facilitates an immediate payment of Basic Sum Assured figure in the event of the demise of the insured parent during the course of the policy.

Riders

Accidental Death and Disability Rider

LIC will pay a benefit in lieu of accident-related death and disability, with the amount capped at the Sum Assured under the basic plan. It should be kept in mind that this payout is conditional upon the overall cover of Rs. 5,00,000 under all polices of the insured parent with the corporation taken together.

Critical illness rider benefit

If the assured person is diagnosed with any of the critical illnesses condition covered under the plan, then the total future premiums will be waived.

Tax benefits

Like other child insurance plans, the ‘Jeevan Anurag’, too, provides tax relief under SEC 80 C and SEC 10 (10)D  of the Income Tax Act, 1961.

Limitations – You should remember that the policy can’t be abandoned before 5 years. Also, no option of partial withdrawal is available, folks.

Kotak’s child insurance plans

Kotak Child Advantage

The Kotak Child Advantage plan, having an entry age of between 0-17 years for the child beneficiary, has a tenure (policy term) of 10-30 years–with a Premium Payment Term of 15 years.

Premium frequency ranges from monthly, quarterly, half yearly and yearly, with the minimum premium amount set at Rs. 4,000 per annum. The policy buyer can go in for a minimum Sum Assured figure of Rs. 25,00,000.

Key benefits

1.    Automatic Cover Maintenance – This facility, available subject to the full payment of premiums during the policy’s first three years, makes sure that the plan is in force even if the insured parent misses his premium obligations.

2.    The assured parent can take a loan from Kotak against the Child Advantage plan, after the scheme kicks into its fourth year.

3.    Bonus – Kotak credits the premiums, net of charges, into a so-called Accumulation Account, and the corpus is invested as per guidelines from the industry regulator IRDA. The investment returns, based on declared (bonus), are added to this account.

Put simply, this Accumulation Account is your personal account where your premiums are deposited, with declared annual returns added and risk and expense charges getting debited. And then, this corpus is invested in several financial instruments (stocks, bonds, commodities, etc.).

4.    Maturity Benefit – When the policy matures, the insured parent gets the higher of the basic Sum Assured or the Accumulation Account.

5.    Death Benefit – If the policy has been effective for at least five years or if the life insured was at least 18 years old, then this child plan gives the beneficiary either the Sum Assured or Accumulation Account whichever is higher, as on the date of the death of Life Insured.

However, if the concerned individual passes away within five years from the onset of the policy and if the insured was a minor (less than 18 years old), then the death benefit would be either the aggregate of all premiums paid (rider premiums not included) till date, or the surrender value at that time, whichever is higher.

Riders – To make sure that the policy is in force even in case of any sudden event, Kotak is offering two optional riders: Accidental Disability Guardian Benefit and Life Guardian Benefit (LGB).

For example, if the parent (premium payer) has chosen the LGB option, then the insurer is mandated to ensure payment of all future premiums and continue the policy till maturity –with the deceased’s family getting a waiver on premium payments.

Tax benefits – The Kotak Child Advantage plan allows you to claim tax benefits under SEC 80 C and SEC 10 (10)D  of the Income Tax Act.

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2 Comments

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