A plan your child can do without

Publication: DNA, Mumbai;   Date: 14 June, 2007;    Section: Personal Finance;   Page: 6

Attactive as LICs Komal Jeevan may appear, it gives you neither cover nor returns

Insurance in India is synonymous with the Life Insurance Corporation of India and vice versa. For a long time, LIC was the only life insurance institution and the only products available were investment-oriented. Till the entry of private players, it did not even have a term product – one major reason why term plans arent very popular in the country, yet.
The popular plans include endowment, money back, whole life, pension, special and childrens plans. These are available in various flavours, but most of them are a combination of endowment and money back. Komal Jeevan, a childrens plan, is one such popular scheme. The sales pitch for Komal Jeevan includes:
It is a guaranteed product with a bonus of Rs 75 per 1,000 sum assured per year.
It can be utilised for your childs education and marriage and you wouldnt have to worry about your child should something happen to you.
The returns are amazing and the highest in the industry. No one guarantees you a bonus of Rs 75.
One of my readers had bought this plan for his son a few years back, falling for these claims. What he did not realise was that this plan essentially covered the life of his son and not his. In order to ensure that subsequent premiums didnt need to be paid on his sons policy in the event of his death, he would have to pay an additional premium.
Whats really on offer?
As per the LIC website, “This is a childrens money back plan that provides financial protection against death during the term of plan with periodic payments on survival at specified durations. This plan can be purchased by any of the parent or grandparent for a child aged 0-10 years.”
Mark the wording “financial protection against death.” One would assume that the policy covers his life. But, no; as the reader discovered, it is the childs life that the policy covers and one has to buy the premium waiver benefit (PWB) along with it.
Risk cover: The risk commences either 2 years from the date of commencement of the policy or from the policy anniversary immediately following the completion of 7 years of age of the child, whichever is later. This means, if you buy this policy for a child whose date of birth is March 12, 2003 (4-yrs-old), then his risk cover will start after 2 years or after he completes 7 years, whichever is later. In this case, the risk cover will start in 2010 for a sum assured.
Death benefit: In case of the life assureds death before the commencement of risk (say before 2010), the policy shall stand cancelled and premiums paid (excluding the premium for PWB) under the policy will be refunded (i.e., the parent will receive only the premiums paid). However, if death occurs after the commencement of risk but before the policy matures, the full sum assured plus guaranteed additions, together with loyalty additions, if any, is payable.
Loyalty additions: Along with the guaranteed bonus, this plan also gets a share of the profits in the form of loyalty additions, which are terminal bonuses payable along with death or maturity benefits. Loyalty addition may be payable depending on the experience of the corporation.
Survival benefit: A percentage of the sum assured is paid on survival to the end of specified durations (see table: Survival pangs).
Lets consider an eg (see table). For a sum assured of Rs 10 lakh for a 4-year-old, the premium is Rs 93,521 p.a. without the PWB and Rs 96,087 with PWB. The risk cover in the first year is Rs 96,087 (i.e., the premium paid). The returns work out to around 4.96%.
Is it worthwhile?
As one can see,
Premiums for this policy are exorbitant
Life covered is that of the child and not yours
Returns are low despite a guaranteed bonus
You and your child would do well to opt for a sizeable cover for yourself and investing the difference.
What should you do if you have this policy?
This policy may be surrendered after it has been in force for 3 years or more. The guaranteed surrender value before the date of commencement of risk is 90% of the premiums paid excluding the premiums paid during the first year and any extra premium paid. Thus, in our eg, if you surrender the plan at age 6 after 3 premiums have been paid, you will receive Rs 1.72 lakh (90% of Rs 96,087 + 96,087 – the first years premium). After the date of commencement of risk, at age seven in this case, the guaranteed surrender value is 90% of the premiums paid before the date of commencement of risk excluding the premiums paid during the first year and any extra premium paid plus 30% of the premiums paid after the date of commencement of risk. So, you will receive Rs 1.72 lakh + 30% of Rs 96,087= Rs 2.01 lakh if you close the policy after 4 premiums have been paid. If you have bought this policy in the last couple of years, you can certainly look at surrendering it and instead buying yourself (parent) a sizeable cover.
The writer runs My Financial Avisor and can be reached at amar.pandit@myfinad.com
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