Banking on parental anxiety

Publication: Business Standard, Mumbay; section Product Analysis; Date September 13, 2009

Child insurance policies on offer are still inferior to pure term policies.

It’s hard to miss the Religare Star Child Plan advertisement on television, where a child is playing a guitar like a rock star. Like most life insurance commercials, this one also hits right on the emotional side of the brain and makes people take note of the product. The product in question is Religare Star Child Plan, a Unit Linked Insurance Plan (Ulip). Its brochure says it’s a Ulip with Invest Protect Option that safeguards your returns and your child’s future. What exactly is this product and is there anything unique in it?
The plan begins with a pitch that your dream has always been to see your children outshine your dream. Life is uncertain and in the event of your untimely death, this plan assures a lumpsum payment and waives all the future premiums till maturity. Isn’t it a similar feature that a lot of child insurance plans already have? Most life insurance companies also have products that offer a similar feature.

As in most insurance plans, you decide on the premium to be paid, the cover you want, the policy term and premium paying term, and then decide on a choice of four funds. Beside the four standard choices, there is another unique one this plan offers, the Invest Protect option.

This option proposes to reduce your equity allocation as the policy nears its maturity. This option will move your investment systematically from a 75-100 per cent equity allocation to 100 per cent debt allocation during the last three years of the policy maturity. In sum, this option provides for a dynamic asset allocation. However, there is no guarantee that the capital will be protected and the investment risk completely borne by the policy holder. If the market falls heavily between the 10th and 12th year, then it may not be a great idea to move into a less aggressive option in the last three years. However, the option does not mention a clear strategy or give an explicit guarantee of protection; it merely says it will reduce equity exposure after the 12th year and protect the investment. Hence, a lot will depend on the fund management skills of the investment team.

Besides this, there are some other features in the product:
Auto-rebalancing: At the end of the policy year, this feature will automatically rebalance your investment in various funds based on the original proportions you had opted for. Let’s say you had opted for 50 per cent in Enhanced Equity Fund and 50 per cent in Secure Fund. At the end of one year, if your equity allocation has grown to 60 per cent, Secure Fund allocation will then be 40 per cent. Hence, this feature will sell some equity, buy more of Secure Fund and rebalance both to 50 per cent. This is again a feature that some Ulips already have.

Special Units: This is similar to the bonus paid out on most policies.You will get special units only if your tenure is 15 years and more. The special units will be added after 10 years and every three years thereafter, and the value of special units will be 1.5 per cent of the average fund value of the last 36 months before allotment of special units. This is very paltry as compared to the charges in this policy.

There are other common features such as switches, top–up premium, change of premium allocation to funds, grace period and some others.

On survival to the maturity date, the fund value at that point of time will be paid to you and there are some settlement choices.

Every Ulip today has four different kind of costs.
Premium Allocation Charge (PAC)
Product Administration
Mortality Rate (Cost of Insurance cover)
Fund Management Charge (FMC)

There are some other minor charges as well, such as Switching, Auto rebalancing and so on.

This policy must be held for a minimum of five years, as the surrender charges are high in the first five years. It is only after the fifth year that you may surrender the policy without any penalty.

As you see in the table above, the premium allocation charge (PAC) in the first year is 30 per cent for premiums between Rs 12,000 and Rs24,999. The PAC from the second year onwards is 3 per cent.

The PAC varies from 10-30 per cent in the first year. Above Rs 5 lakh, the PAC is 10 per cent, else it’s much higher.

Only in the single premium option are there no PAC for premiums of Rs 12,000 to Rs 49,999, whereas it varies between 3-4 per cent for other amounts.

FMC is quite consistent with other insurance companies, between 1-1.5 per cent. The Product Administration charge is quite low, at Rs 30 a month for higher premiums, but if you are paying a premium of Rs 12,000 per annum, then this amounts to 3 per cent of the premium paid.

Overall, the policy does not offer anything unique when compared to most of the plans in the life insurance space.

When it comes to life insurance, the first thing to ensure your child and family’s future is to have a substantially high cover that provides your family a safety net in the event of your untimely death. Buying a Pure Term Plan still remains the best option for your child’s future.You will do well to opt for it first, because it is cheaper and does what insurance products should do – ensure your child in case of any untimely death to you.

The writer is director, My Financial Advisor

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