To save for your children, use low-cost investment avenues.
Most parents are worried about securing their child's future. Which is why life insurance companies launch a slew of unit-linked products targeting children. Recently, Bharti AXA Life launched a new child life insurance plan, 'Bright Stars Plus with Jumpstart Bonus'.
WHAT IS IT?
It is nothing but a regular premium unit-linked insurance policy, which provides a child with a Jumpstart Bonus when the policy matures. Like most policies, one needs to choose the premium to be paid and the policy term. This will decide the sum assured a person gets. Once done, the next step is to choose a fund from the six options.
WHAT ARE THE BENEFITS?
Like most insurance policies, this one will pay the sum assured immediately on death of the policyholder. However, the company adds that future premiums payable are waived till maturity and Bharti AXA will pay the premiums into the investment funds. The policy continues with all applicable benefits until maturity and on maturity the nominee,will get maturity benefits as given below.
| Mortality Rate | |||||
| Gender | Policy Term | ||||
| 7 yrs | 10 yrs | 15 yrs | 20 yrs | 25 yrs | |
| Male | 2.95 | 3.74 | 4.15 | 5.02 | 6.68 |
| Female | 2.75 | 3.38 | 3.60 | 4.21 | 5.49 |
You or your nominee get the Policy Fund Value + Jumpstart Bonus. Most people would really believe the company is giving a free cover and I have heard a lot of insurance agents from other companies talking about this feature in their products as well. On the contrary,the company is giving this benefit because it is charging a much higher mortality rate to the policyholder.
| Premium Allocation Charge |
Policy
Year
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Policy Benefit Period
Mortality rate is the cost of risk cover and is generally expressed in terms of Rs 1.4 per thousand or any other amount per thousand. If you look at the mortality rate table, the rate for a 30-year old male is from Rs 2.95-6.68 per thousand, depending on the term of the policy. In most policies where the above benefit of an additional amount on maturity is not present, the mortality rate is far lower and around Rs 1.4 per thousand. Meaning, this policy is charging 2-4 times the mortality rate and is hence extending this benefit.
The only unique thing about this policy is the Jumpstart Bonus of 5-7 per cent. This bonus is a percentage of average policy fund value at the end of preceding 36 policy months. The percentage payable is dependent on the Policy Term chosen and is as follows:
A Jumpstart Bonus of 7 per cent is only applicable for a policy term of 15, 20 and 25 years. For policy terms of 7 and 10 years, the bonus is 5 per cent. However, based on the illustration table, the net yield comes to around 3.5 per cent of the fund value. This is very insignificant, compared to the charges in this policy.
Besides the jumpstart bonus, there is another feature , an option to decrease premium. In this product, you can decrease the premium amount any time after completion of two policy years. The decrease in premium will decrease your sum assured in the same proportion.
IS THIS POLICY FOR YOU?
Besides the higher mortality rates, the premium allocation charge (PAC)in the first 3 years of the policy is very high. There is no PAC from the fourth year onwards.
Additionally, there is a policy administration charge of Rs 60 per month, increasing at 5 per cent every year, which for smaller premiums of Rs 20,000 will be 3.6 per cent, plus surrender charges and fund management charges.
| How does it work | ||||
| Illustration 1 | Illustration 2 | |||
| Annualised Premium Policy Term Sum Assured (Rs) | Rs 25,000 a year 20 years 250,000 | Rs.50,000 a year 25 years 250,000 | ||
| Assumed rate of return | 10% | 6% | 10% | 6% |
| Jumpstart Benefit (Rs) | 38,164 | 28,276 | 134,022 | 89,449 |
| Policy Fund Value at Maturity | 1,166,430 | 742,587 | 3,827,055 | 2,140,046 |
| IRR at Maturity | 8.04% | 4.16% | 8.31% | 4.45% |
| Note: 6% and 10% are assumed gross investment rates per annum. Also, the above calculations exclude mortality rates, which are very high for this policy, and service tax. | ||||
Overall, the policy does not really offer anything unique when compared to most other child plans available in the market today.
In the case of a 30-year old male paying an annual premium of Rs 50,000 for a period of 25 years, with sum assured of Rs 2.5 lakh, the total premium paid at the end of 25 years is Rs 12.50 lakh. The fund value with the Jumpstart Benefit at the time of maturity is Rs 38.27 lakh approximately.
Now, consider a pure term plan, with a sum assured of Rs 2.5 lakh for a 30-year old male (for term of 25 years). The annual premium for this will be just Rs 1,588. The balance amount of Rs 48,412 a year (after paying premium of Rs 1,588 a year) invested in an index fund at 10 per cent a year will be worth Rs 47.61 lakh after 25 years. There is a huge difference, of over Rs 9.34 lakh. Even if you take an additional cover of Rs 2.5 lakh by paying additional premium of Rs 1,588 and invest the balance, Rs 50,000-1,588-1,588= Rs 46,824 in a 10 per cent investment, you will have a corpus of Rs 46.05 lakh at the end of 25 years. Additionally, when you mix investment with insurance, you are stuck with the same fund manager for an extended period of time.
In sum, it's best to stick with a term plan and invest the balance in a low-cost investment.
The writer is director, My Financial Advisor