No parent wants to compromise on their child’s education. In fact, child education is one of the most prominent goals for almost all my clients. Many readers write with their queries about investing for their kids’ child education too. Many want a one-stop solution for their kids’ education. For this reason, many ask about the “Best Child plan” or the best child plan from LIC/SBI/ICICI/HDFC, etc.
Well, the financial services industry does not let go any demand unmet. Therefore, there is no dearth of such child insurance plans. I had written a
generic post about the structure of such plans and the issues with some of the prevailing product structures.
In this post, let’s pick up a popular child plan from SBI Life, SBI Life Smart Champ Insurance and see if you must consider this plan for your children’s education.
SBI Life: Smart Champ Insurance: Salient Features A non-linked Participating traditional insurance plan. Structured to fund your children’s education. Two premium payment options: Single and Limited Premium Payment Under the limited premium variant, you pay the premium till your child turns 18. In a way, the age of the child determines your premium payment term. The payment term is 18-Age of the child. Policy term is 21-Age of the child Minimum/Maximum Sum Assured: Rs 1 lakh/ Rs 1 crore Life insurance is on the life of the parent (and not the child). There are two insured events: Demise of the parent (proposer), Total and Permanent Disability due to an accident. Loan Facility available Large Sum Assured Rebate Available SBI Life Smart Champ Insurance: Survival/Maturity Benefit
Under the plan, you pay the premium till such time your child turns 18. The maturity benefits are spread over 4 overs. You get maturity benefit in 4 annual installments starting from the end of the policy year in which your child turns 18. Remember policy term will be till your child turns 21. For instance, if your daughter is 3 years old, you will pay a premium for 15 years and the policy term will be 18 years. Of course, if you choose single premium variant, you must pay the premium just once.
At the end of the policy year in which the child attains 18 years of age: 25 percent of Sum Assured + 25% of Vested Reversionary Bonuses At the end of the policy year in which the child attains 19 years of age: 25 percent of Sum Assured + 25 percent of Vested Reversionary Bonuses At the end of the policy year in which the child attains 20 years of age: 25 percent of Sum Assured + 25 percent of Vested Reversionary Bonuses At the end of the policy year in which the child attains 21 years of age: 25 percent of Sum Assured + 25 percent of Vested Reversionary Bonuses+ Terminal Bonus, if any
Reversionary bonus will be announced every year and will keep getting added to the policy. Do note reversionary bonuses will accrue only during the premium payment term. Therefore, no bonus will accrue in the last 3 policy years. Terminal bonus will be applicable only in the final year (when the child turns 21) and will be paid only with the last installment.
By the way, there is an option to receive the installments earlier at a discounted rate. The cash flows, if such option is exercised, shall be discounted at 6.5 percent.
SBI Life: Smart Champ Insurance: Death Benefit
One of the primary concerns for any parent is, “How would the family manage if I am not around?”. Since the plan is structured around planning for kid’s education, the question could be rephrased as, “How will the investments for my daughter’s education continue if I am not around?”.In the event of the demise of the policyholder during the policy term,
The Sum Assured under the policy is immediately paid to the family. All the future premiums are waived. Bonuses keep getting added to the policy even after premium waiver comes into effect. Your daughter gets the maturity benefits as scheduled (for 4 years starting from the end of policy year she attains the age of 18)
The pay-out made at the time of demise does not impact the maturity benefit, which is a good thing.
Do note the parent’s demise is just one of the insured events under the plan. The other insured event is Total and Permanent Disability, resulting from an accident. Therefore, if the parent (proposer) were to become totally and permanently disabled (loss of two limbs, loss of both eyes, etc., the family will get the same benefits as in the event of demise. For more on disability insurance, refer to these posts (
Post 1 Post 2).
Total permanent disability can severely compromise your earning ability. Therefore, total and permanent disability to the parent will cause the same problems (or even worse) so far as your children’s education is concerned. It is good that this plan got this aspect covered.
Structurally, this is how child plans should be. The family gets some lump sum in the event of the death of the parent. The family does not have to worry about any future premium payments as those are waived. The premium waiver does not affect wealth accumulation either. SBI Smart Champ Child insurance plan scores well on this front.
However, we need to look at the prospective returns too. Let’s see how SBI Smart Champ fares on this front. Let’s explore this through an illustration.
Illustration: SBI Child Plan (Smart Champ)
I copy the illustration from the product brochure. You can check the premium and prospective benefits for your case on
SBI Life website.
You are 35 years old. You are planning to invest for 6-year old daughter’s education. You opt for limited premium payment variant and a Sum Assured of Rs 5 lakh.
Annual Premium before taxes shall be Rs 41,410. After GST, the premium in the first year shall be Rs 43,273. Annual Premium for the subsequent years shall be Rs 42,341.
You will have to pay the Premium for 12 years (18- 6). You will get life cover for 15 years (policy term).
Even though we are in 2019, let’s simply go with the illustration provided in the brochure. Let’s say you purchase the plan on March 1, 2014. You will have to pay 12 annual installments. Last installment will be paid on March 1, 2025. Life coverage will be till March 1, 2029.
The insurance company will make the payments on March 1 in the years 2026, 2027, 2028 and 2029.
The sample has two illustrations. Illustration I is with return on investment of 4 percent while Illustration II is with return on investment of 8 percent. Given the kind of investments this plan will make, 8 percent ROI seems a very fair (or even optimistic assumption). I mean Illustration II might just be the best or very close to the best-case scenario.
Let’s see how net returns look like with Illustration II.
As you can see, the pay-out comprises two components. 1.25 lakh (25 percent of Rs. 5 lakh) is guaranteed each year. Remaining is variable and is linked to accrued bonuses. The final instalment has an additional component of terminal bonus.
The IRR is this case turns out to be 4.05 percent p.a. Well, this is way too low.
PPF gives you about 8 percent p.a.
While I appreciate that SBI Life Smart Champ provides life and disability insurance benefits too, this is still too low a return for a long-term investment. You must also note that the life and disability insurance amount is not very big and unlikely to be enough.
The premium for life cover of Rs 50 lakh and a total permanent disability cover of Rs 25 lakh for a 35-year-old (for 15-year policy term) is about Rs 7,000 per annum. You can simply invest the remaining amount in
PPF. You will get a higher insurance cover and better investment returns. If PPF gave 8 percent p.a. and did not have withdrawal restrictions, you could have generated the exact same cash flows as with SBI child plan and still be left with about Rs 1.25 lakh. Clearly, better coverage and better payouts. A few other points to note
With these plans, Sum Assured is linked to your ability to pay premium. Annual premium (before) for Rs 5 lakh cover is Rs 41,410. For Rs 10 lakh cover, the premium goes up to Rs 82,820. You can go up to Rs 1 crore. However, what if you cannot afford such a high premium? With these plans, you run the risk of being under-insured. By the way, this is not a problem with just this plan. This is a problem with all traditional life insurance plans and even ULIPS too.
What should you do?
I quite like the structure of this plan. It is very easy to understand too. Just that the returns are way too low. Avoid.
By the way, if you still find merit in such a plan, you might be better off seeking professional assistance from a SEBI Registered Investment Adviser (RIA).
The cost of professional financial advice is likely much lower than the financial damage caused by poor financial products. Please note, being a SEBI RIA myself, I do not deny the conflict of interest.