Child plans’ costly guarantees
ULIPs aren't the right way to secure your child's future, but plans that guarantee that premiums will continue to be paid even after the policyholder's death are particularly useless.
Child plans, despite being completely unnecessary products, find takers because the bulk of them offer certain guarantees. With most plans, the insurer promises to continue to pay premiums even after the policyholder’s death. This guarantees, while seemingly beneficial, come at a high cost, which makes these plans a particularly poor option, even if you don’t take into account all the other downsides of a unit-linked insurance plan (ULIP).
Guarantee charge forgotten
Insurance agents, as well as brochures, usually fail to mention that guarantees cost money. This you’re supposed to figure out yourself. It is logical that an insurer would charge you for keeping the policy in force and paying the premiums even after your death, but failing to mention that it costs money seems deliberate. Child plans are very complicated products and agents can be very convincing when they’re trying to make a sale.
Exploiting the absence of ceiling
There’s no cap on guarantee charges fixed by the Insurance Regulatory Development Authority (IRDA). In fact, IRDA even permits insurers to exclude it while arriving at the net yield of the plan. This is how insurers are permitted to charge you big money while making such promises.
Ilustration of cost difference
While, with ULIPs, the mortality charges usually reduce as the years go by, with child plans that stay in force even after the policyholder’s death, the mortality charge increases year after year. Here’s the difference in cost over 15 years of the plans offered by Aviva Life and HDFC Life, as compared with regular ULIPs.
In the following cases, the calculations have been made for a premium of Rs1 lakh.
|Plan name||Guarantees||Age||Term||Sum assured||Mortality charge|
|HDFC YoungStar Supreme||Yes||35||15 years||Rs10 lakh||Rs80,982|
|HDFC YoungStar Super||No||35||15 years||Rs10 lakh||Rs35,196|
|Aviva Young Scholar Advantage||Yes||35||15 years||Rs15.75 lakh||Rs1,53,270|
|Aviva Freedom Life Advantage||No||35||15 years||Rs15.75 lakh||Rs53,287|
These plans, as you can see, offer paltry coverage at a high cost, even the ones that don’t offer a guarantee. Many Indians, in fact, are inadequately insured because they have purchased life cover only via a ULIP.
Useless compared with a term plan
If you were considering a child plan yourself, here’s how much you could insure yourself for with a term plan if you were willing to pay Rs153,270 (as with the Aviva child plan) or Rs80,982 (as with the HDFC child plan) over 15 years. For Rs150,000, you could buy Rs1 crore cover for 15 years with Tata AIA Life’s iRaksha Supreme. For Rs80,000, you could buy Rs59 lakh cover for 15 years with Aegon Religare’s iTerm.
In case of death, which is the only case when the guarantee discussed above would come into effect, the family of the policyholder would be much better protected with the term plan. After all, even if the child plan grows at 10% per annum with the variables shown above, it would still only be worth Rs26.21 lakh (with the Aviva plan) and Rs26.03 lakh (with the HDFC plan) at the end of 15 years, as per the insurers’ calculators. The term plan, despite its low cost, offers financial security against any misfortune. With a single term policy, you could secure not just your child’s future, but your family’s lifestyle for years to come.