Insights

Is Children’s ULIP Suitable for You?

April 3, 2014 . Sridharan S

As a parent, you must have paid a sizeable sum of money as donation for your kid’s admission in school. Besides this, you also have to regularly pay a certain sum of money for your child’s fees, and additionally, you have to save for his/her higher education too. However, with rising costs of education, it is quite likely that inflation has been eating into your savings. For example, today, the cost of an engineering course in India is Rs. 8,00,000. After 10 years, it could cost approximately Rs. 33,00,000, assuming inflation at the rate of 10% every year. This is a modest estimate considering how according to a recent survey, the cost of education is increasing at 15-20% on a yearly basis.

To combat inflation and save effectively for your children’s education, term insurance, along with disciplined investments in mutual funds, are important tools. There are also a few children’s Unit-Linked Insurance Plans (ULIPs) that are being offered by insurance companies that help you save effectively for your child’s higher education.

The main advantage of children’s ULIPs are that they offer individuals a triple advantage, along with high insurance coverage, disciplined investments, and participation in the equity market along with the choice of a rider option. Triple advantage means that at the eventuality the sum assured is paid to the nominee, the future premium is waived off and the maturity value would be paid at the time of maturity, ensuring that your children’s future dreams are fulfilled.

All of the above advantages come with a little higher cost in the initial years. These costs were drastically reduced after the IRDA changed regulations in September 2010. All the policies that were launched after September 2010 have lower costs compared with the ones launched earlier. However, if the investment period is long and one is investing in a well disciplined way, the costs tend to be covered, given that one gets to participate in the equity market over the long term. Therefore, children’s ULIPs are recommended only for those individuals who have a time frame of 10 years or more.

These policies are also reasonably transparent in terms of where they are investing, their charges and also offer varied asset allocation, along with a few free switches, where one can change the asset allocation depending on the market condition.

One main disadvantage of ULIPs is that surrender charges are hefty during the initial years. This is to encourage investors to keep the policy on hold till the maturity date which will bring in discipline in investments.

The important difference between a term plan plus a mutual fund combination versus a Children’s ULIP is that the earlier one offers a high cover at a low cost and gives out a lump-sum amount to the nominee, if the policyholder dies. But the policy ends right there.

On the other hand, a children’s insurance plan offers a lump-sum payment on the death of the policyholder, but the policy does not end. All future premiums are waived and the insurance company continues investing this money on behalf of the policyholder.

Thus, a children’s ULIP ensures that your child’s dreams are fulfilled, no matter what your child wants to be, no matter what the cost of fulfilling it, no matter what the circumstances are.

Comparitive Study – Children’s ULIP vs. Term Insurance and Mutual Funds

Let us consider the case of 32 year old Ranjan who has a 3 year old daughter. He wants to plan for his daughter’s higher education, the time for which is 15 years from now.

The above illustration is based on a term plan and a child plan offered by Kotak Life Insurance Company, which have investments in large and mid-cap assets. In both cases, the return assumed is 8%. The mutual fund used in this illustration belongs to a similar category. In both the cases, the return assumed is 8% CAGR.

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