Comparison of Child Plans

by Gopal Gidwani on March 10, 2011 · 26 comments

in Financial Planning

Introduction

Every parent aspires to give the best of everything to his / her kids. Every parent dreams that his / her kid gets the best education in the world and his / her wedding should not be less than any other ‘big fat Indian wedding’ and it should be one of the most talked about events in town. Parents do everything it takes to accomplish this dream of theirs. So the moment the kid is born parents start investing for the kid’s education and marriage. Parents explore various options to invest for their kid’s education and marriage which may include investments in direct equity shares, mutual funds, child insurance plans, real estate, fixed deposits, National Savings Certificate (NSC), Public Provident Fund (PPF), and Government Bonds etc. etc. Parents make sure no investment avenue is left unexplored when it comes to choosing an investment option for their kid’s future. They make sure their kid gets the best of everything. In this article we will keep our research limited to some Child Insurance Plans.

Child Insurance Plans
Child insurance plans help the parent in securing the financial future of their children. The child plans are purchased by the parents to save funds for their children’s education, marriage and other financial needs of their children. Child plans also offers financial security for children’s future in case any unfortunate event occurs like the parents unfortunate untimely death. Some important features of child plans are:

  • Help in saving funds for future financial need such as education and marriage.
  • Provides insurance cover for the child or the parent depending on the plan chosen.
  • The sum assured is paid to the child at the maturity of the policy along with bonus in case of traditional plan or the fund value is paid in case of ULIP. 

 Life Insured
In some child insurance plans the parent is the life insured. These plans mostly come with a built-in ‘Waiver of Premium’ Rider. This ensures that in the case of unfortunate untimely death of the parent the future premiums are waived off and paid by the insurance company and the plan is continued as normal.

In some plans the child is the life insured. These plans work a little differently than other insurance plans. The coverage on the life of the child starts after the child attains a specified age (mentioned in the plan). For example in case of LIC’s Komal Jeevan the plan can be started when the child is just born. But the life cover on the child’s life starts either two years after the commencement of the policy or after completion of 7 years of age of the child, whichever is later. This time gap between the start of the policy and the start of the life cover on the life of the child is known as the deferment period. The date on which the life cover starts is known as the deferred date. If the child dies before the deferred date the parents are just returned the premium paid so far and not the sum assured because the risk cover has not started. In case the child dies after the deferred date then the sum assured is paid.

When the child turns 18 years old the title of the policy automatically passes on to the child from the parent. This process is known as vesting. The date on which the policy transfer happens is known as the vesting date. In LIC Komal Jeevan there is no built-in waiver of premium rider. The parent (proposer) can pay a little extra premium and add the waiver of premium rider so that the policy is continued by LIC in case of early death of the policy.

There are three kinds of child plans available in the market – Child Endowment Plans, Child Money-Back Plans (both these plans come under traditional child plans category) and Child Unit Linked Insurance Plans (ULIPs). Traditional plans invest major proportion of the premiums in debt instruments like Government Securities (G-Secs), corporate fixed deposits, bank fixed deposits etc. and are low risk investments. ULIPs invest in both equity and debt as per the choice of the policyholder and as a result it has scope to offer comparatively higher returns on the investments.

Now let us see an example of each type of Child Insurance Plan

1) Child Money Back Plan – LIC Komal Jeevan
In this plan the life insured is the child and not the parent. The policy can start as soon as the child is born but life cover begins only after 2 years of commencement of the policy or after the child had attained 7 years of age.

Premiums can be paid either yearly, half yearly, quarterly or monthly. The premiums have to be paid regularly till the child turns 18 years old. The policy provides guaranteed additions of Rs. 75 per thousand sum assured for each completed year. This effectively means 7.5% annual return is guaranteed by LIC. Over and above this LIC may pay Loyalty bonus depending on the performance of the company.

Komal Jeevan is a money-back policy and pays the following benefits as per the age of the child:
Survival Benefit
The percentage of sum assured as mentioned below will be paid on survival to the end of specified durations 

On the policy anniversary immediately following the life assured attains the age of % of Sum Assured
18 years20%
20 years20%
22 years30%
24 years30%

In case of death of the child during the policy after the commencement of risk, the sum assured along with the accumulated guaranteed bonus and loyalty additions (if any) will be paid.

2) Child Endowment Plan – ING Creating Life Child Protection Plan
This is also a traditional plan, but this is an endowment plans unlike LIC’s Komal Jeevan which is a money-back plan. In this plan the parent is the life insured. This plan comes with a build-in ‘waiver of premium’ rider. On the death of the parent during the policy tenure the sum assured is paid by the insurance company. The future premiums are waived off. The subsequent premiums are paid by the insurance company. On maturity of the policy the child is paid the sum assured along with the accumulated annual bonuses and the final additional bonus (if any).

 3) Child Unit Linked Insurance Plan – Max New York Life Smart Steps Plus
In this plan the investment risk is borne by the insured as he chooses where his premium after deductions should be invested. In this plan the life insured is the parent. The insured can choose from 5 available funds for investment of premium. In case of death of the parent the company will pay the entire sum assured. The future premiums will be waived off (built-in waiver of premium rider). The company will continue paying the premiums. The company will also pay a ‘Family Income Benefit’ @5% of the sum assured to the nominee / beneficiary on each policy anniversary in case of death of the life insured. On maturity of the policy the company will pay the fund value.

Traditional Plans: Let us take a look at some of the traditional plans available in the market:

FeaturesLIC Komal Jeevan Child PlanICICI Pru Smart Kid Regular Premium Child PlanING Vysya Creating Life Child Plan
Type of PlanMoney Back PlanMoney Back PlanEndowment Plan
Min And Max Age Limit  (Child)0-10 years0-12 years0-17 years
Min And Max Age Limit  (Parent)20-50 years20-60 years18-55 years
Min And Max Sum AssuredRs 1,00,000 – Rs 25,00,000Rs 1,00,000 – Rs 30,00,000Min – Rs 80,000

Max – No limit

Premium Payment Term8 – 18 years. Till child turns 18 years10 – 25 years10 – 25 years
Min PremiumRs 7281 p.a.Rs 8,400 p.a. Rs 8,000 p.a.
Premium payment FrequencySingle premium, semi annually, annually, quarterly, monthly or salary saving scheme.Monthly, semi annually or annually.Monthly, quarterly, semi annually or annually.
Premium waiver benefitHas to be bought with additional premium payment.Built-in with the policyBuilt-in with the policy

 ULIP Plan: Some of the child ULIPs plans available on the market are: 

FeaturesLIC’s Child Fortune PlusMax New York Life Smart Steps PlusSBI Life Smart Scholar
Min And Max Age Limit  (Child)0-10 years91 days – 15 years0-17 years
Min And Max Sum AssuredMin SA is  5 times  and max SA is 25 times of the annualized premiumMin SA = Annual Target Premium (ATP) x policy term x 0.5

Max SA = Annual Target Premium x policy term.

Min SA is 10 times of the annualized premium. The maximum is 20 times of the annualized premium.
Fund SwitchingThe plans allows 4 free  switches in a year between different fundsThe plan allows 6 free switches in a year. The min switch amount is Rs 5000.2 switches allowed free in a year for a minimum of Rs 5,000.
Min PremiumRs 10,000 p.a.Rs 20,000 p.a.Rs  24,000 p.a.
Premium  Payment FrequencyMonthly, quarterly, semi annually or annually.Monthly, quarterly, semi annually or annually.Monthly, quarterly, semi annually or annually.
Premium Waiver BenefitPremium will be waived, in case of death of the parent.Premium will be waived, in case of death of the parent.Premium will be waived, in case of death of the parent.

 Analysis

  • Gift: These policies can also be gifted by close relations such as grandparents, uncles etc. to the child. However the proposer can only be the parent or legal guardian. In LIC Komal Anand, the close relatives have the option to gift single premium policy.
  • Section 80C Benefit: Policyholder can avail deduction for premium paid for child plan while calculating taxable income. These deductions can be claimed under Section 80C of the Income Tax Act for premium paid upto Rs. 1,00,000 annually.
  • On death of the parent:  In case of unfortunate demise of the parent insured, all the policies pay the sum assured in lump sum. The further premiums are waived and the fund value is paid at maturity.
  • On death of child: In case of ICICI Pru Smart Kid regular premium and ING Vsya creating life child plans, even if the nominated child dies, the policy continues. Whereas, in LIC Komal Jeevan, the sum assured along with accrued bonus is paid and the policy is closed.
  • Maturity benefit: In ICICI smart kid, the maturity benefit is payable to the child at the age of 22 years. In case of LIC’s Komal Jeevan, the maturity benefit is payable when the child is of 26 years. The ING Vsya creating life child plan is a money back policy, hence the maturity benefit is payable in the 4th, 8th, 12th and 16th year. In ULIPs, the, maturity benefit (fund value) is payable at the end of the policy term.
  • Surrender value:  In LIC’s and SBI child plans the policyholders can surrender the policy after the third policy anniversary. Whereas in Max New York Life Smart steps plus plan the policyholder can surrender the policy after the first policy anniversary, provided an amount equal to one annual target premium (ATP) has been paid.
  • Loan: The SBI life regular unit plus child plan offers loan to the policyholders, after the 3rd policy year.
  • Exclusions: If the insured parent commits suicide within one year of the commencement of the risk, policy becomes void and no claim is payable by the insurance company.

Conclusion
There are several child plans available in the market and parents have to be extremely careful in selecting one. The purchase of child plans should be need based. For example, if the need to purchase a child plan is for daughter marriage, then in this case an endowment plan with guaranteed returns will be more appropriate where the insurance company pays a lump sum amount after a certain period, instead of regular payouts. Though most of the features are almost similar in all the child plans, the policyholder should look at ‘waiver of premium’ benefit in the child plan, which ensures that the child continues to get the benefits of policy, even if the parent  is not there to provide for him.

For any comments on the article please comment in the section below or write to us at gopal_gidwani@yahoo.com

{ 26 comments… read them below or add one }

vaibhav June 11, 2011 at 3:16 pm

Hi Gopal,
very nice and informative .But my query is whether to go for such child traditional plans or ulips as mentioned above or else one should go for mutual funds offering like fidelity india children plan or simple large cap mutual funds through SIP.Please opine.

Reply

Gopal Gidwani June 12, 2011 at 8:23 am

Hi Vaibhav,
The best way to accumulate money for your child’s future is to go for diversified equity mutual funds. Don’t go for traditional life insurance plans or child ULIP plans or Child Mutual Fund Plans. Go for plain vanilla diversified equity mutual funds through the SIP route. Give your investments a good time horizon of 10 – 15 years to generate good wealth for you to use it for your child’s future development.

Reply

vaibhav June 12, 2011 at 12:25 pm

Hi Gopal, thanks so much for excellent piece of advice..one more confusion!!!what really is this value averaging investment plan (VIP) route of investing in equity mutual funds..is it really better than SIP route..or just a commercial stunt to confuse invester. If it really helps then how to invest through icicidirect using vip.

Reply

Gopal Gidwani June 13, 2011 at 2:53 pm

Hi Vaibhav,
According to analysts VIP is better way on investing in equity mutual funds than SIP. But understanding VIP is little more complex than understanding SIP. Also in SIP the amount to be invested is fixed every month, whereas the amount to be invested in VIP changes every month based on the total value of your portfolio. When the market is high the amount to be invested is less or zero or even negative (you sell units and get money) and when the market is lower the amount to be invested in more. At times when the market falls drastically the amount to be invested may become even higher than the amount you have spare to invest. But VIP makes sure that you achieve your goal. You can read more about VIP at the below link:
http://articles.economictimes.indiatimes.com/2011-05-23/news/29568997_1_investment-plan-investment-strategy-total-investment

But I will suggest you to make your investments through SIP rather than VIP. As SIP involves a fixed amount investment per month and easy to understand and follow.

Reply

HARSH SHAH July 2, 2011 at 7:40 am

It is best to take Term Plan of large amount and go for sip in diversified fund .. In case of Reliance they provide SIP with insure. it is also best option for long term. Endowement plan yield on maturity comes only 6 to 7% and in case ulip it is not more than 12% if fund manager is better, and hidden charges are too in ulip

Reply

Gopal Gidwani July 5, 2011 at 6:03 pm

Hi Harsh,
I do agree with you that a person should look at insurance only for pure protection (term plan) and should go for mutual funds for investments. But lot of people do ask for a review of various insurance plans. So the article was written keeping that in mind.

Reply

Chandra Sekhar August 3, 2011 at 1:09 pm

Dear Mr. Gopal,
Can you tell me that LIC is declaring Rs. 75 per 1000 SA as bonus. Tell me that whether it is guaranteed for the whole pay term. Means every year we shall get the same bonus and there is no fluctuation in bonus rate ?

Reply

Gopal Gidwani August 3, 2011 at 2:51 pm

Hello Chandrasekhar,
Insurance companies declare bonus every year based on their financial performance. So every year the bonus rate can differ. So if a bonus of Rs. 75 per 1000 SA is declared for a particular financial year, it is applicable only for that year and not for every subsequent year.
Also the bonuses declared by lot of companies are simple revisionary bonuses and not compounded. Also these bonuses are paid on maturity or on death, if death happens during the tenure of the policy.

Reply

CHANDRA SEKHAR August 10, 2011 at 3:21 am

Dear Mr. Gopal,
I got your reply. Thank you for that. Another thing I would like to ask you that one LIC agent told me about Komal Jeevan child plan. He told me that LIC has declared a bonus of Rs. 75/- per Rs.1000/- and it is guaranteed for 18 years or till the maturity. Means if I take a Komal Jeevan plan then LIC will give me a bonus of Rs.75/- per Rs.1000/- till 18 years or maturity. Is this true ? If this is true, then it is a good policy and I would like to do one. But if not then the agent is misguiding me. Please suggest and suggest a child plan for which I should go for.

Reply

Gopal Gidwani August 11, 2011 at 7:00 pm

Hello Chandra Sekhar,

The guaranteed return that the agent told you of 7.5% is correct. But please note that this return of 7.5% is simple interest and not compound interest. Also in today’s scenario the education and marriage costs are going up by around 8-10% compounded. So this return of 7.5% (simple interest) may not take care of your child requirements.

Also you should not mix up investments with insurance. You should go for term insurance for insurance requirement and you should invest in mutual funds for your child’s future development.

Reply

Chetan September 29, 2011 at 8:49 am

Dear Gopal,

I would like to congratulate to have written this knowledgable comparison and guiding us through.

I would like to ask you that I have a ULIP SMART Steps Plus (Fund Coverage) from Max, I started this exactly 3 years back in Sep-2008, please let me know how should I proceed, should I continue or change to another plan.

Reply

Gopal Gidwani October 10, 2011 at 7:10 pm

Hello Mr. Chetan,

Ideally you should keep insurance and investments separate. For insurance you should go for term insurance and for investments (for child education, marriage, retirement etc) you should go for mutual funds,

Reply

Jagadeesh Kumar November 9, 2011 at 11:26 am

Hi Gopal,

i would like to know about ICICI SMART KID POLICY, A 11 years child with annual premium of 23,500 (appx) for a sum assured 2 Lacs amount, how much amount i get at the time of maturity. please, can you tell me the complete details about it…

Reply

Gopal Gidwani November 19, 2011 at 1:04 pm

Hello Jagdeesh,
The maturity amount of the ULIP will depend on the performance of the fund (equity, debt or balanced) that you have chosen for premium investment. I will suggest not to mix up investments and insurance. I will suggest you go for a pure term insurance plan for insurance and invest the remaining amount in mutual funds to build a fund for your child’s future. Refer the following article for child education fund
http://www.bachatkhata.com/2011/11/planning-your-child%e2%80%99s-higher-education.html

Reply

Chalapathi January 30, 2012 at 12:06 pm

Hi Mr. Gidwani, at the outset, let me congratulate. u r doing a great job. Ur articles are quite informative and it seams i have gone completely wrong in planning and need re-do every thing from scratch. I have lot of queries. Let me ask category wise. In Oct 2008 i took a PLI for Rs. 5 L which runs for 31 years @ Rs.1175/- per. month. I was told that, in addition to the sum assured i would be getting 7% bonus on the insurance amount (Rs. 5 L). Now i understand that as insurance policy it’s a bad bet. But when i checked up the returns assuming that 7% bonus is going to be throughout am getting around 11% returns but not compounded. But once again i am making payment over entire period of 31 years. Similarly, i tool one more policy in PLI in Jan 2012 where i pay Rs. 1375/- per month for 59 years for Rs. 5 L. Now my doubt is do this bouns of 7% is fluctuating alarmingly or something to be left to fate? Second – is my calculation of 11% is mathematically wrong or even if it is right are the returns too low? Finally, if going for PLI is bad call, can come out of them after completing 3 years period and go for MFs along with term insurance for insurance cover. If i com out after 3 years what would be the outcome. My age is 31 by the way. Sorry for being too long.

Reply

Gopal Gidwani February 2, 2012 at 11:25 am

Hello Mr. Chalapathi,
Investment returns on a simple interest basis and not on a compounded basis are not good specially if we are considering a tenure of 31 years. In this case it will make sense for you to take term insurance and invest the remaining amount in diversified equity mutual funds. Over the long periods the equity markets are known to have given returns in the range of 15% CAGR. But to be on a safe side you can assume returns in the range of 12% CAGR. As your age goes on increasing go on reducing your exposure from equity funds to balanced funds and eventually move to debt funds.

With regards to your current policies since the premiums paid are not being very high you can surrender them to avoid further losses. For the policy that you have started in January 2012 it doesnt even make sense to wait till 3 years to surrender the policy. Just simply stop paying the premium and let it lapse and write off that investment.

Reply

vaibhav March 6, 2012 at 7:28 pm

Hi Gopal ..greeting of the day
please allow me to use your expertise and knowledge regarding the financial planning..please tell me which one better option to invest PPF or Baja Allianz- Guranteed maturity insurance plan or LIC jeevan vriddhi or SBI Smart money back insurance plan return wise and features wise and for tax saving purpose.
thanks

Reply

Gopal Gidwani March 7, 2012 at 11:33 am

Hello Mr. Vaibhav,
I will suggest you to keep insurance and investments separate. I will suggest you to buy a term insurance plan on your own life and to build an investment fund for your child’s education and marriage investment the remaining amount in
1) PPF if your risk appetite is low
2) Balanced mutual funds if your risk appetite is medium
3) Diversified equity funds if your risk appetite is high

Reply

Zakir July 28, 2012 at 7:29 am

Hi Gopal,
I already have term plan. Now I want to invest for my child’s marriage plan. Now I am 38 yrs & My daughter is 7years old. Pls advice me which plan will be the best in terms of investment. ICICI GSIP, HDFC Youngstar or LIC children plan. secondly which plan will you suggest for child’s education plan.

Reply

Gopal Gidwani July 29, 2012 at 8:28 am

Hello Zakir,
I will suggest you invest in mutual funds for your child’s education and marriage rather than investing in child insurance plans.

Reply

Ram January 16, 2013 at 4:03 pm

Hi Gopal

I am curently 39 years old and having two daughters aged 8 and 7 years, could you please suggest me some good investments for my children education and marriage.

Thanks

Reply

Gopal Gidwani April 14, 2013 at 10:18 am

Hello Ram,
You may look at a mix of equity, debt and balanced mutual funds to invest in for your daughter’s education and marriage.

Reply

gopi August 2, 2013 at 3:09 pm

Hello sir.
Am Gopi from Andrapradesh.I have invested Rs 50,000(31-07-2013) in sbi smart scholar policy for my kid age of 7months old .my agent told that u have to pay up 5 years and u will get large amount .so i agreed to invest 50,000 upto 5years.my question is that which i have invested amount up to 5 years.2,50,000(each year 50,000 rupees) .after 5 years will i get back my money without any charges .and my agent put this policy up 25years. am thinking that i wanted to close my policy.please help sir i was so nerves abt this policies.

Reply

sijith January 2, 2016 at 3:02 pm

Please advice me regarding the genuineness of Sbi child scholar plan.I want to know is it the best plan which I can opt for my 2 yr old kid.

Reply

nidhi May 11, 2016 at 7:03 am

hi
can you tell me the best child plan for my kid.

Reply

Biswajit February 5, 2017 at 8:14 pm

Hi sir can u tell me some best balanced funds for sip ….from urs openion

Reply

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