Personal Finance

Investing in Kotak Child Plan

Suresh Parthasarathy | Updated on November 26, 2011 Published on November 26, 2011

A combination of the public provident fund and a pure term cover may deliver the same benefit at lower costs.



Saving towards children's education is a top priority for most Indians. With this in mind, Kotak Life Insurance recently launched Kotak Child Edu Plan, a limited premium “with profits” plan.

“With profits” implies that the plan will declare bonuses if any. This plan will have guaranteed payouts coinciding with the higher education needs at ages between 15 and 21 for your child. As the plan covers your life, the goal is protected in case of unfortunate demise of the insured. This plan's premium paying term is 17 years.

How it works

The plan pays out 125 per cent of the sum insured at different stages of your child's life to meet education expenses. Payouts are at 15 per cent of the sum assured at 15, 20 per cent at 17, increasing to 30 per cent at 19 years and 60 per cent at the age of 21. At maturity, the plan may declare a terminal bonus if the portfolio fares well.

Death benefits: Kotak Life will ensure that 200 per cent of the sum insured is paid in the event of your demise, with all future premium obligations ceasing. The policy, however, continues as planned with milestone payments. The accrued and future revisionary bonuses along with terminal bonuses, if any shall be paid at maturity.

Accident disability benefit: In the event of the policyholder's disability due to accident, again future premium obligations cease and the policy continues with all benefits assured at the time of buying it.

Premium: The plan offers premium discount of Rs 2 per 1,000 of the basic sum assured. For instance for a plan with sum assured of Rs 5 lakh the eligible premium discount is Rs 1,000. The premium can be paid yearly, half –yearly, quarterly and monthly.

Eligibility: The minimum age at entry for the policy buyer is 18, the child must be just born. The maximum age of the insured is 64 years, with the child's age pegged at 10. The minimum sum assured is Rs 2 lakh and the premium payable varies based on the mode opted.

Our take on the policy

In any traditional policy, be it endowment or money back, returns are based on the frequency of the disbursement and the add-ons opted for. If the risk covers are increased beyond the sum assured offered, a sizable portion of the investments will be deducted towards the risk charges. Returns are likely to be moderate. In this plan, if the insurer earns a return of 6 per cent on the investment the effective returns are likely to be around 4.2 per cent. If the portfolio does well, if the plan is able to earn a return of 10 per cent, the net effective return for the policyholder will be less than 6.5 per cent. In debt investments, the average return a policy holder can expect will be capped at 5-6 per cent.

Does this plan suit me?

If you have the discipline to save regularly and invest, this plan will not be an ideal choice for two reasons. One, you can replicate the same benefits if you construct a portfolio with the Public Provident Fund with a pure term cover; this will cost you less.

For the same investment you may also get a higher risk cover. For instance, if a 31-year old male buys a policy with sum assured of Rs 5 lakh, his annual commitment will be Rs 36,104 for his just-born child. At end of the policy period, he would have received Rs 7.62 lakh with an internal rate of return of 4.2 per cent (based on assumed returns of *** per cent). If the individual is in the 20 per cent tax bracket the effective yield could increase to 6 per cent. The total life cover under the plan would be Rs 10 lakh.

The same person building a portfolio with the PPF, if he earns an average return of 7 per cent for the entire investment period of 17 years, would end up investing Rs 19,990 for the same maturity value of Rs 7.62 lakh. His goal would be reached four years ahead of the maturity of the plan.

As to the life cover, for a Rs 20 lakh cover, his premium outgo would be Rs 3,277. Thus, the overall outgo in this PPF plus term cover combination would be Rs 23,267 annually, Rs 12,837 lower than this plan. In the event of untimely death of the bread winner, the beneficiary can utilise 50 per cent of the sum assured Rs 10 lakh for immediate needs.

The remaining Rs 10 lakh can be invested in fixed income instruments at 6 per cent.

This would result in an annual inflow of Rs 60,000, far higher than the investment requirement to meet the goal.

Does this mean this plan is not suitable for you at all? No. If you are not investment-savvy or disciplined, traditional plans such as this may score mainly on account of their forced savings and few riders.





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