Insurance Basics Part V - Child Plan

By Prajna Capial

This article explains the basic concept of a child plan, as is available in the market today.

What is a Child Plan?

It has typically two components to it:

• A life insurance on the parent
  
  


• An investment vehicle that accumulates your savings on a regular basis and pays it back around the time the child reaches college (typically when he/she turns 18-21)

These two components are thus very different in what they achieve to secure the child's future, and any analysis must keep this distinction in mind at all times.

The Insurance Component

Life insurance in the child plan ensures that the monies payable to the child for higher education are protected against untimely death of the earning parent. I cannot overplay the importance of this insurance - in fact, my observation has been that most people underinsure their life in these policies.

By mandate, the minimum life cover that you have to opt for in a child plan is

Sum Assured = Term * Annual premium / 2

Thus, if you take an 18-year plan, paying Rs. 50,000 every year, the minimum life cover is Rs. 4.5 lakh. Now, if you have no other life insurance, a little bit of thinking would reveal to you that this life cover is woefully inadequate. After all, if you can afford to save Rs. 50,000 a year towards a single plan, it is likely that your annual income is at least Rs. 5 lakh. Thus, the insurance for the child does not even cover one year of income!

Instead, one would recommend a life cover of at least 7-10 times your annual take home pay, if not more. This provides adequate security and cover for your spouse and child to financially sustain in the event of your untimely demise.

The Investment Component

As mentioned earlier, the other function of a child plan is to enable you to save regularly and pay back the money (with returns) when the child is entering college. Here, it is important to note that the plan is simply a pass-through - it invests the money in a set of securities on your behalf, for a fee. The plan in itself does not have a mechanism to generate returns, let alone freebies. Depending on how the securities perform, the amount available to the child gets decided.

Thus, there is no such concept as a freebie here - any benefit that the plan offers you (flexibility to switch, loan facility, premature withdrawal, waiver of premium, etc) is paid for by you in full as part of the premium. For instance, if a college promises your child 'free laptops' after charging a fee of Rs. 10 lakh, you would recognize that the laptop is not really 'free'. All that the college is doing is allocating a portion of the fee to purchase laptops and distribute them. Similar is the case with additional features thrown in by insurance companies. Each feature has a cost that gets cut from your premium payment.

The investment can be either in debt securities (in the traditional plans) or in equity instruments (the unit linked plans). Given the strength of equities in the long term, any plan that is greater than 5-7 years in duration should be invested predominantly in equities. Else, it is likely that you will end up earning very low returns and not covering the inflation in education costs.

Of course, as in case of insurance, the alternative here is to invest in equity mutual funds instead of child plans. Analysis reveals that this (equity mutual fund) may actually be a much better option, since it has much lower transaction costs and is more flexible and liquid. Most child plans have upfront allocation charges in excess of 15%, as against only ~2% for mutual funds!

Putting it together

In summary, the child plans available today fare poorly on both the insurance and the investment parameters, as compared to alternatives available in the market. The term insurance beats the child plan hands down, while the mutual funds provide a lower cost way of investing the corpus.

Insurance Investment

Rule of thumb Insure your life to at least For tenures greater than 5-

7-10 times your annual Income 7 years, invest in quities (or unit linked plans); for lower tenures, invest in traditional schemes

Yes, these alternatives require somewhat of a more hands-on approach to financial planning. But given that it's your child's future that we are talking about, it is probably well worth it!!

Insurance Basics Part IV - Unit Linked Insurance Plan - ULIP

By Prajna Capial

Understanding the cost structure of Unit Linked Insurance Plan is necessary before taking the leap

A person, 40-year-old investor, was disgruntled with his investments in Unit-Linked Insurance Plan (ULIP). While the equity markets have been rolling, he realized after some research that he was yet to recover the money he had invested three years ago. This, he realized, was not on account of poor fund performance but because of higher initial fund costs. While the people crib is about the non intimation of such expenses by his/her broker, insurance regulator IRDA has come to his rescue, making it mandatory to disclose all charges upfront to the buyers.

Basic rules have to understand the cost structure of a fund before buying into ULIPs. And a basic understanding would save them from heartburn. So how are the cost structured for an ULIP?

COSTS OF OWNING A ULIP:

1) Premium Allocation Charge

The cost structure of ULIPs is such that it starts working to your benefit only after 5-8 years of investing. A part of your premium payment goes into Premium Allocation Charge, which is calculated as a percentage of the premium. This percentage is generally higher in the first few years-the main reason: it takes years to break even on investments. It could be as high as 40% of each year's premium.

2) Policy Administration Charge

A monthly fixed amount that usually rises every year with inflation or as a percentage of the sum assured.

3) Mortality/Rider Charges

ULIPs also have mortality/rider charges, which depends on age, sex and the level of risk cover in a particular year. If you don't avail risk cover, mortality charges can be zero. The mortality charge per Rs 1,000 of the sum assured varies from 1.3 for a 30-year-old to 6.4 for a fifty-year-old.

4) Fund Management Charge (FMC)

Then you have the fund management charge, an adjustment to net asset value (NAV) on a daily basis. Usually, insurers charge it as a percentage of funds under management. ULIPs could have a fund management charge between 0.5%-2.0% per annum.

So with so many chargers around what should be the strategy to get good retuns from ULIPs

STAY LONG TO REAP THE BENEFITS:

If you are ready to cool your heels for 10 years, ULIPs will be a viable financial option. If you anticipate some liquidity need in one to three years from now, ULIPs are not for you. You should look at this investment product only if you leave your money untouched for beyond five years. A good time horizon would be around five years to 30 years. ULIPs are meant for disciplined, regular and systematic investment towards a goal.

The reason is that if you invest the same amount in a mutual fund as well as a ULIP, the former gives better returns than the latter because of the cost structure. There is a point of inflexion at six years, then on the ULIPs begin to give better returns than mutual funds.

THUMB RULES FIR ULIPS:

Start Early: If you start at the age of 30-35, you can create a 20-year long-term investment by investing in SIP route.

Invest Regularly: Do not get deterred by market swings. A systematic long-term periodic investment will help you go a long way.

Choose your fund:

Depending upon your age and risk profile. Use the switches effectively.

You may have opted for a mix of 75% equity and 25% debt on your ULIP. But when you inch closer towards maturity, minimize your exposure to equity as low as 20%. If the market turns bearish, it may slash your assets at the time of maturity. It's better to bet safe as you are close to retirement, Also have a rein on the number of switches though they come free of cost. Frequent change in asset allocation might not be a wise move after all.

You should always have a balanced approach to your investments in your middle age. It protects you better from risks. Now, even if you go for a long-term ULIP, it works to your advantage as it isn't adversely affected by the vagaries of the equity market.

Insurance Basics Part II - Life Stages

By Prajna Capial

Life Stages

Your insurance need will change as your life does, from starting to work to enjoying your golden years and all the stages in between. Each one of these stages may pose a different insurance need/cover for you. In this section, we have drawn up the basic life stages and help you analyze various insurance needs accordingly.

STAGE 1 : Young and Single

An important stage where one lays down the foundation of a successful life ahead. Take advantage of the time and power of compounding to ensure that you build up your dreams. Start saving early.

Your needs:

• Save for a home and wedding


• Tax Planning


• Save for Golden years

STAGE 2 : Just Married

Marriage brings about a significant change. New dreams and new opportunities also bring in additional responsibilities. While both of you look forward to a happy and secure life, it is equally important to ensure that eventualities don't come in the way of shaping your dreams.

Your needs:

• Planning for home / securing your home loan liability


• Save for vacation


• Save for your first child

STAGE 3 : Proud Parents

Once you have children, your need for life insurance is even more. You need to protect your family from an untoward incident. Ensure your protection umbrella takes into account the future cost of securing your child's dream. You will want life to go on for your loved ones, and having enough life insurance is a way to help ensure that.

Your needs:

• Provide for children's education


• Safeguarding family against loan liabilities


• Savings for post-retirement
  

STAGE 4 : Planning for Retirement

While you are busy climbing the ladder of success today, it is important for you to take time and plan for your life after retirement. Having an early start for retirement planning can make a significant difference to your savings.Think about your golden years even before you have reached them. The key is to think ahead and plan well using your time and money.

Your needs :

• Provide for regular income post retirement


• Immediate Tax benefits


• Lead a secure, independent and comfortable life style in your retirement years


• Choosing the right plan
  

Identifying the right plan basis your needs is the first crucial step towards insurance planning.

Analysing Needs...What is your need?

Protection

Need for a sound income protection in case of your unfortunate demise.

Investment

Need to ensure long-term real growth of your money.

Saving

Save for the milestones and protect your savings too.

Pension

Need to save for a comfortable life post retirement.

Once you have analyzed your needs as per above classification, you need to then ascertain important factors such as type of cover, insurance amount as per one's income, life stage and dependents. It is difficult to arrive at all these figures yourself. Our financial consultants can help you.

Insurance Basics Part III - Types

By Prajna Capial

Why Do I Need Life Insurance?

You need Life Insurance because typically the need for income continues for those who are financially dependent on you, but there is no guarantee of your ability to earn consistently and for the rest of your life. Life insurance can help you safeguard the financial needs of your family.

This need has become even more important due to steady disintegration of the prevalent joint family system, and emergence of nuclear families. The need to protect your family's ever growing needs is why you need Life Insurance.

Life insurance is designed to protect you and your family against financial uncertainties that may result due to unfortunate demise or illness. You can also view it as a comprehensive financial instrument - as a part of your financial planning offering you savings & investment facilities along with cover against financial loss. By choosing the right policy as per your needs i.e. customized solutions, you will be able to plan for a secure future for yourself and your loved ones.

1. UNIT LINKED

Market linked insurance plans invest the premium in to the equity, debt and cash markets by the way of allocating units, which like any other mutual fund have a NAV and the customer is free to switch between one fund class to another depending on the risk factor he wishes to be in.

ULIPs offer -

1) Better return than the traditional endowment plans and

2) Offer a great deal of flexibility along with great returns making them the finest product offering.

ULIP products can range from single premium to a regular premium option along with investment funds ranging from index funds to mid-cap funds and debt market linked funds.

a) Regular Premium

Unit Linked Single Premium Plans require the premium to be paid at the interval agreed on the application.

b) Single Premium

Unit Linked Single Premium Plans require the premium to be paid only once.

2. PENSION

Retirement Plans which will make sure that we are there to support you in every stage of your life and your savings today become your wealth and support for your future years to come. Plans help you secure your financial independence even after retirement.

a) Annuity

Annuity is an insurance scheme under which an insurance company promises to make a series of fixed periodic payments to a person in exchange for a premium or a series of premiums called the purchase price.

b) Retirement

Retirement is the beginning of the twilight of the journey of life when you have done all that you could to arrive at this point of time, and now left with time to reflect back on what was, and also what is to come. Our retirement plans help you to retire with laughter lines - not worry lines.

3. TRADITIONAL

Saving Plans, which offer bonuses, are excellent long term saving instruments with complete safety. Our products offer additional benefits which include 4 times life cover at little extra costs, limited premium payment terms and compounded reversionary bonuses making it a very good long term investment.

a) Endowment

Life insurance cover with a savings component. Apart from death benefit, a predetermined sum is paid at the end of a specified term. A plan in which the amount is paid to a policyholder if he outlives the tenure of the contract or to the beneficiary if the insured person dies before the date on which the policy matures.

b) Money Back

A plan in which part of the sum assured is paid back to the policyholder at regular intervals.

Money back plans are Traditional Insurance plans that provide the investor with returns at regular stages of life.

4. TERM PLANS

A type of life insurance where the sum assured is payable only in the event of death of the life insured during the specified term. In the case of survival, the contract expires and the premium is not paid back to the insured.

The sole objective of Term plans is to serve the protection needs of the customers and by doing so, safeguard one's family from the financial implications of unfortunate circumstances that one cannot foresee. These plans are pure risk cover plans with or without maturity benefit. These pure risk plans cover your life at a nominal cost and you may want to take this plan to cover your outstanding debts like a mortgage, a home loan etc.

5. CHILDREN PLAN

As a parent, you always dream the best for your child including marriage, higher education, or that hand holding for a start in life. Whether you are there to see your child grow up and settled or not, your child feels your love in the financial support arranged by you through our wide range of Children's insurance policies taking him from one milestone to another.

Saving early and saving regularly for your child helps combat inflation and ensures higher yields. If you take an insurance policy for your child you can take advantage of lower premium rates and ensure that your children remain covered throughout adult hood, at a much lower rate. This also instills a saving-habit in your children at a young age developing them as and when the policy vests in them.

Insurance Basics - Part I

By Prajna Capial

Insurance

Insurance is the lifejacket you wear in a storm, the umbrella that shields you in a downpour, It does not prevent these events from taking place, but makes sure that their impact is lessened and that you have something to hold on to.

It gives you the financial security and certainty to deal with the aftermath of these events. It becomes the earning member of the family and supports you and your family during the rough times.

Why Life Insurance

Protection

You need life insurance to be there and protect the people you love, making sure that your family has a means to look after itself after you are gone. It is a thoughtful business concept designed to protect the economic value of a human life for the benefit of those financially dependent on him. That's a good reason.

Supposing you suffer an injury that keeps you from earning? Would you like to be a financial burden on your family, already losing out on your salary? With a life insurance policy, you are protected. Your family is protected.

Retirement

Life insurance makes sure that you have regular income after you retire and also helps you maintain your standard of living. It can ensure that your post-retirement years are spent in peace and comfort.

Savings and Investments

Insurance is a means to Save and Invest. Your periodic premiums are like Savings and you are assured of a lump sum amount on maturity. A policy can come in really handy at the time of your child's education or marriage! Besides, it can be used as supplemental retirement income!

Tax benefits

Deductions from gross income on Life Insurance premium paid (Traditional & Unit Linked Plans)

Under Sec 80C of Income Tax Act

Available for Premium paid (max. up to 20% of SA) on Life Insurance policies with a maximum ceiling p.a. Rs. 1,00,000 irrespective of the Gross Total Income.

A maximum of Rs. 1,00,000 p.a. paid as a contribution on a pension plan is fully deductible from the taxable income (within the max. ceiling Rs. 1 lakh )

Under Sec 80D of Income Tax Act

Premium paid for Critical Illness rider is deductible as medical insurance premium from the annual income chargeable to tax up to a maximum amount of Rs. 15,000.

Exemption from the Life Insurance proceeds

Under Sec 10(10D) of IT Act

Maturity benefits are tax-free in the hands of the policyholder if, at any point of time during the policy life, premiums paid within one year do not exceed 20% of the basic Sum Assured.

Death benefits are tax-free.