A guide to buying Ulips for your kids

Sure, we all want to make our children's future secure. But how we go about it differs. While some macro-vision people use less plastic and water so that the earth survives the kids, the rest of us try and buy financial security.

The way we do it again differs. Some buy plots of land, some invest in gold, yet others in shares or funds. A popular way has been to buy an insurance policy.

One thing that works in the favour of a child plan using an insurance policy is that the money is clearly earmarked for the use of the child at a target date for a particular purpose, be it education or marriage.

In case of the parent's death, the sum assured is immediately paid to the family and the insurer pays the remaining premiums on behalf of the parent. This way, the child's needs are taken care of in case of the parent's death. Moreover, the child gets another lump sum at the desired age.

Sure, a high-value term plan can take care of the child's future, but there is the real danger of the money getting used for some other purpose in the hands of an inefficient nominee of the policy.

How is it different

A kids' plan costs more than any other alternate approach, but does assure you of money in the future for your child, even if you are not there to take care of the premiums along the way.

For example, an endowment life insurance plan would cost about Rs 23,500 for a sum assured of Rs 5 lakh for a 30-year-old over a term of 20 years. In contrast, a child insurance plan for the same age, term and sum assured, will cost about Rs 24,000.

In both cases, the sum assured is paid on the death of the policyholder, but in a child plan the policy wouldn't terminate after that.

There can be two variants of children's plansendowment plan and unit-linked plan. In the first variant, staggered payments are made to your child at different ages.

For example, 20 per cent is paid when he turns 21, 20 per cent when he is 24 and the remaining 60 per cent when the policy matures. In the second variant, one may choose to get a lump sum amount at the desired age.

In the past year, we have written several times on what kind of child plans there are in the market and who should buy them. The story in this issue will talk about how you should choose a kids' plan.

Which one to buy

If you are sure you need a kids' plan, the obvious question is which one to buy. There are numerous plans in the market and the number is steadily growing.

With kids' plans constituting the maximum number of the total plans sold, they are obviously one of the best sellers for the insurance companies. So, expect more in the market soon.

What we will do here is to give you handles with which to evaluate kids' plans. Shut out the emotional appeals to your fear and guilt, the two negative emotions most companies play on to sell more.
 

And stay with the cold numbers, they give the warmest comfort. Talk to all companies and ask for the following information.

Ask for a policy that insures you and not the child, especially if you do not have adequate insurance. The nominee or beneficiary is the child. It is your income that we are replacing with the policy. In case you still need to buy in the child's name, ensure that the rider waiver of premium is attached.

This rider ensures that the policy will run its course even when the parent dies. The insurer will start paying the premiums on the parent's behalf.

Use a unit-linked product as they are more transparent and you get to choose your investment vehicle, according to your risk appetite.

Choose one of the 70 per cent-plus equity optionsthese are usually called growth, equity, multiplier or maximiser. Remember that you are targeting a payout that is at least 15 years away. Research has proved that if held over 12 years, the Indian stockmarket throws off 17 per cent average return per year. So why lose out on growth.

Choose a plan that gives an immediate lump sum and continues the policy with the targeted staggered payments coming at various ages still on track. HDFC Standard Life Young Star, ICICI Smartkid, Kotak Headstart Child Plan-Future Protect and Aviva LittleMaster are some of the plans that offer this.

Ask for a 10 per cent illustration on the policy you have chosen, which will show your projected return in accordance with your age and the term of the policy. Now, ask what the real, or post-cost rate of return is at this 10 per cent illustration. It will be between 7.5 to 8.5 per cent. This means that the ongoing cost of the policy over the target period is 10 per cent minus this figure. Select the top three insurers that give the highest return.

Now ask for return performance on their various funds. All Ulips have several funds in which your money can be put to work, much like a mutual fund. Assuming that you choose the growth or the equity plan, ask for the NAV performance for the last two years at least. Choose three with the highest performance track record vis-a-vis the benchmark.

Now choose the best performing policy in terms of returns with the lowest cost.

With reports from Anand Rawani