Plain maths show PPF investment plus term policy may work better
FEBRUARY marked the revival of traditional children's plans of life insurance companies with the launch of three education schemes; Bharti Axa Life launched Future Champs on February 2, Aviva floated Young Scholar Secure on February 15 and Max New York Life unveiled College Plan on February 17.
Till then, ICICI Prudential's Smart Kid regular premium plan, which was launched in 2002, and Life Insurance Corporation's Jeevan Anurag, launched on November 2004, were the only options available.
One common feature about education plans is that the maturity benefit is disbursed in a phased manner, synchronising cash flows with different stages of education.
Here is how it works. Say your child is five-year-old. In Max New York Life's College Plan, you will need to pay a regular yearly premium till the child is 18 years. In the year the child turns 18, you will receive 40 per cent of the total sum assured.
The insurance company will disburse 20 per cent of the sum assured over the next two years and the remaining 40 per cent along with non-guaranteed bonuses at the age of 21.
In Bharti Axa Life's Future Champs, the premium payment term is 15 years and the insurer provides you with two options.
The first allows disbursal of 20 per cent of the sum assured in the 12th and 13th policy years and
30 per cent and 35 per cent along with 4 per cent guaranteed addition in the 14th and 15th years.
Under the second option, 10 per cent of the sum assured is provided in 10th policy year and then 20 per cent, 35 per cent and 40 per cent along with 4 per cent guaranteed addition in 12th, 14th and 15th policy years, respectively.
In Aviva Young Scholar Secure plan, the premium payment term and the sum assured depend on the age of the parent and the children and the premium option chosen.
Rising cost of education has become a major concern for parents, and they now want additional funds for their children not only for higher education, but during the schooling years as well.
Child education plans are like moneyback policies and have an investment portion as well as a life cover portion.
An analysis suggests the estimated return on these policies make them less attractive investment options.
For instance, if a 32-yearold parent has a five-year-old child and the time horizon is 17 years, for a life cover of Rs 10,00,000, he will need to pay yearly premium of Rs 65,000 for LIC Jeevan Anurag and Rs 68,000 for ICICI Pru Smart Kid.
Assuming that the interim payments that these policies accrue in the later years are to be re-invested, at the end of the tenure of 17 years, LIC Jeevan Anurag and ICICI Pru Smart Kid will generate an approximate annual return of 5.75 per cent and 5.10 per cent. respectively.
This is after factoring in an accumulated bonus of Rs 8,04,000 in LIC Jeevan Anurag and Rs 4,84,443 in ICICI Pru Smart Kid, as estimated by the two companies.
These amounts are to be paid on maturity along with the final installment of the sum assured. However, it is not guaranteed by the insurance company and depends on future investment performance.
If the same parent takes a life cover of Rs 10,00,000 by buying a pure-term life policy that entails a yearly premium of Rs 3,000 and invests the balance Rs 65,000 in public provident fund (PPF), it can fetch him an annual return of 7.23 per cent, which will be more or less assured as PPF is considered a sovereign and safe investment.
