Keep the reins in your hands

All parents dream of a better life,education and lifestyle for their child. But dreams alone do not suffice...

Written by Suneeti Ahuja | Published:March 2, 2009 11:12 pm

All parents dream of a better life,education and lifestyle for their child. But dreams alone do not suffice; you need to put in place a plan of action to ensure that all the needs of your child are met. While there are many investment avenues available for ensuring your child’s future,child plans by life insurance companies are the most popular ones. A host of traditional and unit-linked plans are already available in the market. Now,Aviva Life Insurance has added another plan to this category — Young Scholar — which is a unit-linked endowment plan. The plan offers great flexibility,choice,and is quite competitive on charges. Let’s take a closer look at its nitty-gritty:

Features

The parent is the insured in this plan and the child is the beneficiary. It means that in case of the parent’s (the policy holder) demise,the sum assured is paid to the child (the beneficiary). Aviva has in-built the waiver of premium option into this plan that will protect the policy from ceasing on the death of the parent. Instead,the child gets the sum assured immediately. The remaining premiums are paid by the company as a lump sum into the fund value,which is then allowed to grow till maturity.

This is a very important point to note while shopping for a child plan. Express Money recommends children’s plans that insure the parent rather than the child. In case of an unfortunate event,it is the child who needs the insurance money rather than the parent.

Parents in the age bracket of 18 to 50 years can buy this plan for their children up to the age of 17 years. The minimum premium is Rs 15,000 in case you choose a premium paying term of 10 years or more. However,if you choose to pay the premium only for three or five years,then the minimum premium payable is Rs 50,000.

Policy holders can make partial withdrawals after five years. However,this feature should be exercised in emergencies only. You also get the flexibility to revise the premium or the sum assured during the policy term. Besides,the company bumps up the fund value with additional units every five years.

Riders. The plan offers a choice of three riders: accidental death benefit,comprehensive health benefit rider and income benefit. The accidental death benefit rider pays the child the sum assured on death of the policy holder due to an accident. The comprehensive health benefit rider covers you against 18 critical illnesses. In case of the parent’s demise,the income benefit rider will take care of your child’s education and other ongoing expenses by her 10 per cent of the sum assured every year.

Fund choices. This plan offers a choice of five funds: Protector,Bond,Balanced,Growth and Enhancer. The Protector fund will invest 60-100 per cent in debt securities,0-40 per cent in money market instruments and 0-20 per cent in equities; Bond fund will make 100 per cent investment in debt and money market instruments; Balanced fund will invest largely in debt and market securities and 0-45 per cent in equities; Growth fund will invest more in equities (30-85 per cent) and restrict its investments to debt and money market securities to 0-40 per cent. Lastly,Enhancer fund will invest 0-60 per cent in equities and rest in debt. While these funds are for an investment-savvy customer,automatic asset allocation fund takes care of customers who want to rely on the expertise of the fund manager.

Charges

On this count,the plan fares better than other plans in the market. It charges a premium allocation charge (PAC) of 18 per cent in the first year and 10 per cent in the second year. It gradually tapers off to 1 per cent after the sixth policy year.

These charges are much lower in case you opt for a premium payment term of three or five years. In these cases,the company charges only 10 per cent PAC in the first year,4 per cent in the second year,and 2 per cent thereafter. There are other charges like the mortality and policy administration charge that are deducted from the fund value.

Returns

All the funds have given decent returns since inception. The compounded annual return (CAGR) from the Secure Fund is 9.8 per cent; from Protector Fund is 10.7 per cent; and from Balanced and Growth it is 19.6 and 18.2 respectively.

In case investments are made in the Protector Fund,then for a 20-year policy with an annual premium of Rs 15,000,the yield net of charges will be 8.02 per cent. For the same term period but for an annual premium of Rs 50,000 and Rs 1 lakh,the yield will be 8.46 per cent and 8.56 per cent respectively.

What the experts say

This plan looks good for people who want a bundled plan and are ready to pay an extra price for it. “Usually,one does not find all these options in one plan. It is a comprehensive plan that will take care of all the needs of the child,” says Darvesh Panchal,assistant vice president,Prudent Brokers.

On the cost front,it is quite comparable with the other plans in the market. If you can afford them,the three- and five-year premium payment options look better as their charges are much lower.

However,to secure your child’s future,one must also look at various other cost-effective options. First of all make sure that you have adequate life insurance. This will take care of your family and child’s needs in your absence. Opt for a term insurance cover rather than a unit-linked policy,which is usually expensive. Next step is to look at other investment avenues. “People should build their own portfolios rather than relying on child plans for securing their child’s future. Parents can look at three investment avenues: PPF,large cap stocks and gold. One can also choose fixed deposits by banks,” says Amar Pandit,a Mumbai-based financial planner.

By keeping the reins in your own hands you can ensure that you have adequate control over your child’s future.

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