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March 31, 2000

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Insuring your child

Larissa Fernand

This could be done for a variety of purposes. Either you would like to insure your child for higher education or for marriage. Or maybe just as a safety net. Savvy planning should see to it that it is not a hindrance.

The key is to start planning when the child is very young. You can opt for a scheme that requires you to pay a premium, which means you will have to put a small amount aside every month. Or you could opt for a scheme that requires you to put a lump sum once and for all.

The problem is that it is difficult to determine the actual rate of return based only on the premium paid since there are loyalty bonuses, and age of entry & exit of the scheme and the amount insured are other variable factors. Most schemes also waive the premium if the parent who bought the policy expires.

As for tax benefits, UTI schemes get the benefit of section 80L of the Income Tax Act, while Section 88 applies to LIC schemes.

Your child is: A girl not more than 5 years old.
Your option: Rajlaxmi Unit Plan II offered by the Unit Trust of India.
How it works: A lump sum is given to the child on turning 21 with no dividend in the interim. So if you invest the mandatory minimum of Rs 1,500, you will get Rs 15,000 after 20 years on maturity. This works out to an annual compounded yield of 12.5 per cent. Withdrawals can take place if there is an emergency, but the child has to be not less than 18 years of age.
The scheme, however, has a provision whereby UTI has the flexibility of lowering the rate of return. If that happens you will be given the option of withdrawing the units at the prevailing net asset value.

Your child is: Not more than 10 years of age.
Your option: Children's Money Back Policy of LIC.
How it works: When the child turns 18, the payment of the premium ceases and the benefits start to flow. The first installment of 20 per cent of the sum assured is paid on attaining the age of 18. Another 20 per cent is paid when he/she reaches the age of 20, followed by two tranches of 30 per cent each at the age of 22 and 24.
When the beneficiary reaches the age of 26, the guaranteed bonus (of Rs 80 per Rs 1,000 of the sum assured every year) and the loyalty bonus is paid to him/her.
Assume you take out a Rs 2,00,000 policy in the name of a newly born child. Your annual premium would be Rs 10,610 (Rs 884.20 per month). For the total of Rs 190,980 that you pay over 18 years, you will earn a tax rebate of Rs 38,196, reducing the actual outgo to Rs 1,52,784. Your child would get Rs 40,000 when she reaches 18, another Rs 40,000 when she attains the age of 20, Rs 60,000 at 22 and another Rs 60,000 on her 24th birthday. That's not all. She would also get a lump sum of Rs 4,16,000 as accrued guaranteed bonus and an estimated Rs 80,000 as loyalty bonus.

Your child is: Not more than 12 years old.
Your option: Jeevan Kishore offered by LIC.
How it works: You have to decide at what age you want the child to get the money. It could be 20 years, 25 years, 30 years, 35 years, 40 years and even 45 years. The entire amount will be given as a lump sum at the required age. On maturity of the policy, the sum assured is payable along with the bonus and terminal bonus. If the insured person dies, the same benefits are available to the nominee.

Your child is: A girl between the age of 1 and 12.
Your option: Jeevan Sukanya offered by LIC.
How it works: This scheme not only covers her life but that of her spouse too, but only after she turns 20. This is done at no additional cost.

Your child is: Not more than 15 years of age.
Your option: Children's Gift Growth Fund from the Unit Trust of India.
How it works: Your child will get the money on turning 21. A complete or partial withdrawal is possible (provided the latter doesn't result in a balance of less than 200 units) after he or she turns 18. A lump sum at the end of the period with no dividend in the interim. But your investment will be compounded at the rate of 12 per cent per annum.

Your child is: Not more than 17 years of age.
Your option: Jeevan Balya offered by LIC.
How it works: At the age of 21. If the parent dies before this age, the child will receive a regular quarterly income and is not liable to pay any premium.

A common characteristic of all the above schemes is the assured return. But if you are willing to take some amount of risk for a higher return, then check out the mutual fund schemes specially designed for children. Currently, there is the Tata Young Citizens' Fund, (TYCF) Kothari Pioneer Children's Asset Plan and UTI's open-ended Children's College and Career Fund. Do verify with each as to which instruments they predominantly invest in, whether they tilt more to debt or equity or are balanced funds.

The TYFC provides an accidental death coverage for the child that is 15 times the amount invested, though the upper limit for the coverage is Rs 1,50,000.

In the Kothari Pioneer Plan, you can opt for the education or gift plan. The former gives a regular dividend after a lock-in of only four years. But the investment made when buying the units can be withdrawn once the child has turned 18. Under the gift plan, there is a dividend option (opt for dividend payments) and a growth option (dividends are reinvested in the scheme). The UTI plan offers regular dividends after the child turns 18 and the fund has to be liquidated by the time the child is 26 years.

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