Handle with care

If you want to ensure that your children's future is secure, opt for insurance plans that are specially designed to fulfill this need.

Sarbajeet K. Sen/ Chandralekha Mukerji        Print Edition: February 2011

The little bundle of joy that just arrived in this world or the toddler holding your hands learning to take his first steps is filling your lives with wonderful emotions and moments. But, as you lug around the little fellow in your arms, there is a possibility that you might forget that in the days to come the child might need a little more than your love and affection.

Bringing up children and providing for their educational needs, especially higher studies, involves money, and a lot of it at that. If the child is bright and ambitious, complementing your desire to impart the best education possible to keep the nose ahead of competition, it could add that more stress to your pocket.

Education costs are rising incessantly, and the best-of-the-best campuses, which we all secretly desire our kids to walk on, require more than a fortune. Not all the bright ones get to lay a hand on scholarships. Also, as we witnessed during recent years, there is the possibility that one's admission year falls during those bearish periods when universities shrink their scholarship baskets due to funding cuts.

30% is the share of child plans of all insurance sales by Bharti Axa, HFDC Life and Max New York Life.
So, what's the way out? There are a whole range of options that can work for you. Over times, systematic investment in a mix of equities, mutual funds, commodities, such as precious metals, or fixed income instruments may help build a sizeable corpus to secure one's overall future financial needs.

But this is a general purpose financial portfolio, not one that is targeted at a specific future financial goal. When it comes to securing you child's financial future, the answer perhaps lies in systemised financial planning that should start in the early days of the child's life.

Child plans from insurers and mutual funds can play an important part as these instruments are structured towards taking care of the child's educational needs.

Our interaction with market players and financial planners suggests a general thumbs-up for insurance child plans as an investment tool, which, incidentally, is gradually taking a larger portion of each insurer's overall business. However, when it comes to a similar dedicated offering for children on the mutual fund platform, the response was rather lukewarm.


A child policy is designed to make money available to the child for higher education.
MALAY GHOSH
Executive Director
and President,
Reliance Life Insurance
If you have missed both the options because your child grew up when such niche plans were not popular or because you never bothered, and are now looking for finances to pay for your child's higher education, all hope is not lost. You can walk into any public sector bank and apply for an education loan.

However, there is a catch. There is a cap of Rs 10 lakh on loans taken for pursuing a course at an institute within the country and Rs 20 lakh for studying abroad. Both limits may be woefully inadequate in meeting the expenses incurred at the best-in-the-line colleges and universities.

MONEY TODAY has put together a package that could provide you a broad guidance on how to utilise products specifically geared towards fulfilling your children's financial needs. However, as each individual's needs and goals differ, the help of a financial adviser could come in handy to decide how to implement these plans.

CHILD INSURANCE PLANS
What is it about child insurance plans that insurers are seeing a rising demand for them? Providers such as Bharti Axa Life Insurance, HFDC Life and Max New York Life say that sales of child products constitute nearly 30 per cent of their total business.

While the proportion may be lower for other insurers, such as Aviva Life Insurance (10 per cent), Reliance Life Insurance (6 per cent), SBI Life Insurance (4 per cent) and IDBI Federal Life insurance (20 per cent of the Wealthsurance portfolio), all of them say that child products are gradually usurping a larger space of their overall product range.

Experts say that the clincher for a child insurance plan is that it assures that the beneficiary's educational needs would be met even in the event of the death of the principal earner of the family. Though the core focus of a child plan is to provide for education, it can also be structured to factor in additional costs for events such as marriage.

"A child policy is specifically designed for making money available to a child for higher education. Most of them come with a feature called payer-rider that keeps the policy in force even if the parents are not alive. Apart from this, the maturity benefit for a child plan is buytypically paid out in several tranches, which coincides with critical milestones in a child's life," says Malay Ghosh, executive director and president, Reliance Life Insurance.


Parents can opt for a traditional plan or a unitlinked one depending on their investment strategy.
MARK MEEHAN
Chief Marketing and Operations Officer, Bharti AXA Life Insurance
Gaurav Rajput, associate director, marketing, Aviva India, says, "This is the only product that ensures the corpus you saved for a child's future is available when the child needs it, whether you are around or not."

Experts believe that the focused nature of the product makes its features attractive. "Insurance should always cater to specific needs. Products from different categories are designed to achieve a specific objective for the customer. No single plan can ideally satisfy all your insurance needs," says Sanjay Tripathy, executive vice-president & head, marketing & direct channels, HDFC Life.

Tripathy says children's plans cannot be compared to endowment or money-back plans, as is often done, as they are designed for different investment goals. A term assurance plan is bought with the objective of income replacement or to provide cover for your liability in case of an unfortunate event, while a children's plan helps you secure your child's future financial needs.

A regular life insurance plan pays the nominee a certain sum of money in case of the demise of the person insured. Family circumstances may mean there is every possibility of the money being spent immediately or elsewhere on more urgent requirements, which would leave the child vulnerable later in life. "A key feature of a children's plan is that the benefit goes only to the beneficiary, in this case, the child," says Tripathy.

Mark Meehan, chief marketing and operations officer, Bharti AXA, points out a small change in the way child policies are bought, which has had huge implications. "Earlier, a simple money-back plan was taken in a child's name. Now, parents take an insurance policy in their name, which would be replaced if there is any loss of income due to the untimely death of an earning parent. So, it has the twin benefits of investment and protection," says Meehan.

6% of the total premium collected by Reliance Life Insurance came from policies bought for children.
GAINING POPULARITY
Not surprisingly, an increasing numbers of parents, who are keen to secure their children's futures in an uncertain world, are earmarking funds for purchasing such products from insurance companies.

"The response to our children's plans has been very good so far. Parents have started appreciating the importance of financial planning, specially for their children's future requirements. Our child plans contributed 25-30 per cent to the number of new policies sold in the previous financial year (2009-10)," says Tripathy.

Manik Nangia, senior vice-president and head (product management), Max New York Life Insurance and Bharti Axa's Meehan put out similar numbers.

"Max New York Life started its child plan in 2007. We launched Shiksha Plus in the beginning of 2010 after conducting an extensive ethnographic consumer study to understand parental behaviour. In the first half of the financial year 2011, child products contributed close to 30 per cent of the company's revenue," says Nangia.

Meehan says, "Child plans contribute to around 30 per cent of our total sales. We expect this to go up as we will introduce a child plan on a traditional platform as well in the coming months."

Those with smaller numbers than these are planning to improve their figures. "Presently, we have Rs 250-300 crore of premium being collected under our child plan, which is 3-4 per cent of our overall premium. We plan to take it to 10 per cent during the next three months. As these are not particularly high-ticket size policies, the premium collected would be spread over nearly 70,000 policies," says Sanjiv Pujari, head, actuary, SBI Life.

Reliance's Ghosh is also aiming for the 10 per cent mark, but over a longer period of 12 months. "The premium from policies bought for children accounts for almost 6 per cent of the total policies sold. The trend has been an upward one and we intend to take it to over 10 per cent this year. As the cost of higher education continues to rise and the need to pursue specialised courses increases, more parents will want to plan their finances better to help secure their child's future. Therefore, the attractiveness of child plans will intensify," says Ghosh.

Aviva is also seeing a major jump in sales on the child platform. "At Aviva, child plans contribute 8-10 per cent of our business. This is up from 2 per cent since 2008. Through the year we had an average growth of 8 per cent with some months showing an 11 per cent contribution from child plans," says Gaurav Rajput.

As child plans are
not high-ticket
policies, the
premium would be
spread over nearly
70,000 policies.
SANJIV PUJARI
Head, Actuary, SBI Life
EARLY PLANNING
Along with the rise in the number of people getting investing in child plans, there is a trend of planning early. "People now considering buying such plans almost from the time the child is born. Going by the present trend in policy purchases, we see children's plans as the growth area for the next decade. Since education costs are going up, most people would like to build a separate corpus for this specific purpose," says G.V. Nageswara Rao, managing director and chief executive officer, IDBI Federal Life Insurance.

Binay Agarwala, senior vicepresident & head, products & strategy, ICICI Prudential Life Insurance, agrees. "There has been a definite and encouraging shift in the trend of parents planning early for their child's future financial requirements. Parents have aspirations of providing high quality education to their children.

However, they do understand that such aspirations can only be fulfiled if they begin financial provisioning from an early stage," he says. A survey conducted by Max New York Life and Nielsen found that the age for entry into life insurance is reducing rapidly with an average age of 28 years. It also found that parents with children below 12 years are also a homogeneous set with similar attitudes and mindset.

Girish Batra, chairman and managing director, Netambit, says that unless parents begin investing early in the child's life, they might end up having no policy to fulfill the purpose. "We have found that the propensity of parents to buy a child plan is highest when the child is born or is very young. That is the time when they are completely involved. As time passes, just as people forget to take health insurance or a term plan, they also forget to take a child plan," he said.

Rs 300 crore is the approximate premium being collected by SBI LIfe for child plans, almost 4% of the total.
PACKAGED SUBSTITUTES
If you seek advice from a financial planner, you might be recommended to get a regular term plan for insurance needs along with investments in other channels such as mutual funds for other financial goals (including the needs of the child). Is this the correct strategy if you the child's financial security is you primary objective?

Some experts believe such a plan might not work for this specific purpose under all circumstances, especially in the event of the untimely death of a parent.

Rajiv Deep Bajaj, vice-chairman and MD, Bajaj Capital says "A general purpose investment plan may indirectly help you to plan for the future of the child but this (a child plan) is a very specific vehicle. So, the tenure of the plan and the riders available are specifically designed for the purpose you are investing the money.


A child plan can ensure that the planning for a child remains unimpeded in case of death of the policyholder.
BINAY AGARWALA
Senior VP and Head (Products and Strategy), ICICI Prudential Life Insurance
It is sometimes better to buy a structured plan for a specific financial goal than buying a general purpose investment vehicle. We actively suggest inclusion of child plans in a portfolio. It is a part of our financial planning exercise."

Tripathy argues that mutual funds are fundamentally different compared with life insurance. As an example, he considers a parent who plans to invest Rs 10 lakh in a mutual fund over a period of 10 years (Rs 1 lakh per year), when this amount will be required to fund the child's higher studies or marriage. If the parent meets with an accident and dies in the fifth year, regular instalments stop.

In the tenth year, the child (if he's the nominee) will only receive the amount that was invested till the fifth year, which will be approximately 50 per cent of the total amount targeted. However, in case of a child plan, the insurance company will pay 100 per cent of all the future regular premiums to the beneficiary (child), as and when due, on an annual basis, in addition to the insured amount (sum assured) paid immediately on the death of the parent.

Binay Agarwala, senior vicepresident and head, products and strategy, ICICI Prudential Life Insurance, says a child plan must figure in every parent's financial planning.

"No financial instrument other than a child plan can ensure that the financial planning for the child remains unimpeded in case of death of the policyholder. When one is making a financial plan for his child, it is imperative that such a plan enable long-term wealth creation," he says.

Also, such a plan has provisions for the financial security of the child as these funds cannot be prematurely withdrawn and utilised for other purposes.

WAIVER BENEFIT
Bharti Axa's Mark Meehan says that other insurance policies don't work as efficiently for securing the child's future due to the option of an in-built waiver of premium on death. This ensures that the child gets the benefits of the policy in the event of the death of the parent/s. This is not available in regular insurance policies, which pay a lump sum on death of the person insured.

While waiver of premium is one important feature, there are others also that make it a viable buy for your child's need compared with other products, such as Ulips. For instance, Max New York Life provides a university education pool to allotake care of expenses on higher education for children or school fee support to the provide for the annual education expenses if the parent dies.

HDFC Life's Tripathy also highlights the simple structure of this product, which is one of its USPs. "In a children's plan, only the sole beneficiary, that is, the child, gets the benefit after a specified age. Children's plans are uncomplicated and a hassle-free solution for a parent who wants to save for his child's future financial needs."


Child plans ensure that the corpus you save for a child's future is handy when he needs it even if you are not alive.
GAURAV RAJPUT
Associate Director, Marketing, Aviva India
INVESTMENT CHOICE
Insurers say that the investment strategy for the child is subsumed in the overall options provided under the Ulip platform and the choice is primarily left to the consumer's discretion.

"An investment strategy would depend on the investor's choice. If he doesn't have time, he can opt to leave the decision to the fund manager. A conservative investor might prefer guaranteed returns, while one with a slightly higher risk-taking ability will opt for more equity exposure. Someone might also choose an asset allocation fund that switches between debt and equity depending on market condition," says Rao of IDBI Federal.

Aviva's Rajput says the fund offerings across all Ulips are common. "The policyholder is free to choose which fund he wants to invest in depending on his risk appetite. In addition, we also offer the option of automatic asset allocation (AAA) and systematic transfer plans (STPs) to the policyholder, which can be used to hedge the fund."

The AAA option allows one to reduce exposure to equity while increasing exposure to debt instruments, according to the investor's age. The STP allows one to systematically enter and exit the equity market, thereby averaging out risks on the investment.

Bharti Axa's Meehan says that should the investor opt for a Ulip on the traditional platform the returns might be comparatively lower. "The option of following an aggressive or a conservative investment strategy lies with the parent as he has the option of buying a child policy either on a unit-linked platform or a traditional platform.

"The choice will depend on how risk-averse the parent is. The traditional platform provides moderate guaranteed returns whereas unitlinked plans will deliver returns depending on the performance of the stock market. There is also an option of choosing a debt fund in a unit-linked platform, which provides moderate returns, but there is no guarantee on these funds," says Meehan.

Max New York's Nangia says that a differentiation of investment options for child plans can be had through dynamic asset allocation funds. "There has been no difference in our investment philosophy for child plans. We have common funds for all our unit-linked plans and follow a prudent investment philosophy to minimise risk while delivering the maximum returns to policyholders.

"However some amount of differentiation could be created in our child policy (Max New York Life Shiksha Plus II) through options such as dynamic fund allocation which frees the policyholders from selecting the investment funds manually. This function enables them to plan investments based on their life stage. This investment strategy endeavours to safeguard their fund from any capital erosion, as the policy progresses and nears maturity," says Nangia.

Going by the present trend, we see children's plans as the growth area for the next decade.
G.V. NAGESWARA RAO
MD & CEO, IDBI Federal Life Insurance
HOW MUCH DO YOU NEED?
There is no 'one size fits all' formula for financial planning and investment goals, says Sujata Dutta, senior vice-president and head, marketing and affinity sales channel, DLF Pramerica Life Insurance. She adds that, on an average, the money required to fund a child's education could range between 8-10 per cent of the monthly income of an individual.

Reliance Life's Ghosh advises that while child plans are good buys to meet specific goals, they should be bought only after studying one's financial plan in totality.

"No single financial instrument can address all the needs of an individual. A child plan is just a part of an overall financial plan that will include a term plan, mutual funds, and other financial solutions. "The overall financial plan is a sum of all such financial instruments. A good plan should combine several financial products to secure the future of the individual and his family," says Ghosh.

Most financial experts would agree with Ghosh. Maybe it is time for you to heed their words and begin to systematically ensure that your child's needs can be fulfilled till he is able to support himself.

INVEST IN YOUR CHILD'S FUTURE

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