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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12 thoughts on “Is Children’s ULIP Suitable for You?

  1. Hi Sridharan,
    Nice article. But you have not mentioned the death benefits. I guess death benefit would be much higher in term plan & MF combo than in ULIP.

    1. Hi Romit,
      The main advantage of the Child ULIP is that the death benefits are high compares to the term+MF Combo. The same is illustrated in the article in a tabular coloumn.
      Regards
      Sridharan

      1. Hi Sridharan,
        The row for death benefits in the table is blank. I hope you are referring to the same table which i am seeing.

        1. Hi Romit,

          There are two rows after the death benefits which explains if the insured dies on the 5th & 10th policy year.

          Rgds
          Sridharan

          1. Thanks a lot Sridharan for your patient & quick reply. I have one more question. As per my understanding death benefit should not depend on the number of years after which the person has died. Then why the amount is different for 5 & 10 years for term plan.

          2. The death benefits will definitely varies in this plan. The objective of the child plan is such that what so ever happens to the insured, the objective needs to be met. If the plan is taken for a 15 years period and the insured died in 5 years, all the future premium is waived off, the sum insured is paid up at the time of death and the fund value will be given at the maturity. In this case, only 5 years of premium is paid and in the case of 10 years, the premium paid is 10 years and therefore, the difference in the death benefit. Hope this clarifies.

  2. So, what is the conclusion ? one should go for ULIPs ? What these calculations be for a return of approx. 15% ?

    1. Hello Sir,

      We suggest you to invest only to the extend of child future planning and children related ULIP which fares better in case of an early death of the insured. The same return is applicable for 15% CAGR as well.

      Hope this clarifies your query.

      Regards
      Sridharan

  3. Hi Sir,

    I have one query. I was looking for my 6 months old child’s future education a couple of months ago and agents from both LIC and IDBI Federal simultaneously approached me about their respective companies child plans.

    Since, LIC is highly trusted in our country, I first asked for details about the new child plan from LIC. When agent gave me details, I was shocked to see that the person to be insured under this plan was child. (I was planning to save for my child’s education and not to earn from his death!!!!). Besides, it was a typical money back plan and I was required to pay for premium waiver benefit rider separately. From the benefit illustration statement, I would have got only 4 to 5% return over a long period of 22 years. Hence, I dropped the plan to buy this pathetic product.

    IDBI Federal also have similar traditional child plan in which I was not interested. (Although, at least the person to be insured is parent). However, the agent told me that they have ULIP as well. Initially I was not keen to give a look at ulip since I read lot of negative comments from other investors about that particular product (high charges, commission to agents etc)

    However, when I saw Benefit Illustration Statement from IDBI Future Star, I was surprised to see that CAGR worked out to be around 6.5% at 8% variable rate working after considering mortality and other charges. Also, premium waiver benefit was in-built. I wanted to stay invested for more than 20 years and I know ULIPS tend to give better returns in the long term (more than 10%). Over this long period, one can make aggressive asset allocation in the beginning. So I chose 50% towards Large Cap Funds and 50% towards mid-cap fund and I am expecting at least 50% more corpus at the maturity of plan as compared to LIC’s new child plan.

    Hence, both me and my wife have invested 25000/- each in this plan and expecting around 24 Lacs at the end of policy term (at 8% although the plan should give more than 10%). So, have I made right choice?

    Below are some of the charges of IDBI Federal Future Star Plan

    Premium Allocation Charge – Year 1 – 3.15%, Year 2 to 22 – Nil
    Administration Charges – Years 1 to 5 – 6.30%, Year 6 to 22 – 3.15%
    Fund Management Charges – 1.35% year 1 to 22
    Mortality Charges – Comparable to other insurers ( + or – 5%)

    We intend to take a term plan and to meet a shortfall if any through SIP in Mutual Fund.

    Can you advice me? Have I made right choice?

    Thank you

    1. Hello Mr. Ritesh,

      Thanks for writing to us.

      The ULIP plans offers a premium waive off in case of anything happens to the insured person. The charges that you had mentioned are works out to be 5% approximately. Compared to this, term plan along with the mutual fund combination would provide you the better benefit in the long term as mutual fund offers a low cost of acquisition. Though you had taken the ULIP plan, we would still strongly recommend you to take up a term plan and start a sip in mutual funds which would be beneficial in the long term.

      Thanks & Regards,
      S. Sridharan

  4. Informative. I was not aware of all this information ,and its definitely helpful .I would recommend TATA AIA Life’s super achiever that I have invested in for my child’s future.The plan provides Guaranteed Maturity Additions at the end of policy term, flexibility to choose from 8 fund options and the plan also gives tax benefits.

  5. I think this is quite an informative article and i don’t hold much information the subject but I would recommend TATA AIA Life’s Super Achiever plan, flexibility to choose from 8 fund options for enhanced investment options and tax benefits. I have invested in insurance as this will protect my child’s future needs.

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