Insurers have jumped into the cradle, quite literally, with stakes running high on children's plans in a last-ditch bid to revive the drooping sales of life insurance companies.
Ten of the 24 life insurers in the country launched their maiden or second child education plan in the last calendar year and almost all of them were conventional, non-market linked products.
This over-enthusiasm for launching children plans has been triggered by the insurers' need to protect their own profitability. Insurance agents have lost the incentive to sell unit-linked insurance plans after the regulator introduced new norms from September 2010. By turning to children's plans, insurers are trying to ramp up sales by touching upon a sensitive point and coaxing parents into buying the policies.
However, traditional children's education plans are money-back insurance policies and are not suitable for providing financial security to your child's future education and other needs. Money-back plans are also the most expensive among all traditional policies.
Multiple choice
Education expenses are increasing 12-15 per cent every year. It means that a post-graduate diploma that costs Rs 1 lakh a year now will cost Rs 10 lakh after 20 years.
In this case, a guaranteed payback of Rs 10 lakh after 20 years is what you will look for in a children's education plan. However, a money-back policy may not be the best option.
Take for example, Aegon Religare's Educare Plan. Aegon Religare Life Insurance is the latest to launch a children's plan. Under this plan, a 30-year-old parent will have to pay an annual premium of Rs 85,180 for 16 years if he/she wants to buy the Educare Plan for a sum assured of Rs 10 lakh for a policy term of 20 years. The payouts will start after the premium paying term, that is from the seventeenth till the twentieth year.
Now consider this. Aegon Religare sells a pure protection plan (term assurance), called iTerm, that is sold over the Internet.
If the 30-year-old parent buys this iTerm Plan for 20 years for a sum assured of Rs 20 lakh (the sum assured here is double the amount one gets in the Educare Plan), he/she will have to pay an annual premium of just Rs 2,900.
However, the premium paid here will be non-refundable under any circumstances. If the policyholder dies within the policy term of 20 years, the nominee will get the Rs 20 lakh sum assured.
Instead of buying the Educare Plan, let us assume that the parent invests the remaining Rs 82,280 (Rs 85,180-Rs 2,900) in a fixed income instrument, such as Public Provident Fund.
At an annually compounded interest of 8 per cent, the accumulation in the PPF account will be Rs 24,12,802 after 15 years.
As an insurance policy, the combination of iTerm and PPF is better than the Educare Plan because if the parent dies during the policy term, the child will get Rs 20 lakh against Rs 10 lakh in the latter.
The payout plan of the iTerm-PPF combination also scores over the Educare Plan. In the case of the latter, the first payout happens after the first 16 years and the entire payout is divided into four installments without earning any additional interest.
In the combo offer, the entire accumulation is paid after 15 years and you can keep the money in another interest bearing instrument and draw it when required.
Hence, the iTerm-PPF combination is a better plan both in terms of return and insurance cover than the Educare Plan.
Perfect score
Let us analyse the plan of another insurer, Aviva. Last year, the private insurer launched Young Scholar Secure ' a traditional children's education plan.
Under this plan, a 30-year-old parent can buy a sum assured of Rs 12,46,000 for an annual premium of Rs 50,773. The policy term is 20 years but the premium paying term is 12 years. The first payout begins from the end of the twelfth year.
Aviva Young Scholar Secure perhaps costs the least among all traditional children plans of private insurers.
Aviva also sells a pure protection plan, i-Life, through the Net. i-Life is also the cheapest online pure protection plans. However, you cannot buy iLife for a sum assured of less than Rs 25 lakh.
If the 30-year-old parent buys iTerm from Aegon Religare for a sum assured of Rs 13 lakh for 20 years, the annual premium outgo will be Rs 2,314. Instead of buying the Young Scholar Secure, the parent can invest the remaining Rs 48,459 (= Rs 50,773 - Rs 2,314) every year in a PPF account and accumulate Rs 14,21,025.
Your total outgo (towards premium payment and PPF contribution) in the combo plan will be Rs 1,52,319 more than that in the Young Scholar Secure plan.
But since you get the full payback five years ahead in case of the combo plan than under Young Scholar Secure, this amount (Rs 14,21,025) can be kept in a fixed deposit earning an interest of 8 per cent per annum for five years, fetching you another Rs 7 lakh as interest.
In other words, by extending the PPF account for a block of five years you can accumulate Rs 20,87,952 at the end of 20 years since you started the combo plan.
Head over heart
It is evident that children's education plans do not best serve your purpose. The sales of such plans benefit insurance companies and their agents, who get a higher commission from selling traditional plans than unit-linked policies.
While insurers are trying to boost their policy sales by playing on customers' emotions, the final decision rests with you to think beyond emotions and get real with numbers and calculations.
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