Secure your child's financial needs

The recently launched Kotak Headstart Child Plan is designed to help parents save money for the long-term financial needs of their children. It has two variants: Future Protect and Assure Wealth. The life insured in both versions is the parent and the beneficiary is the child. 

Features
In both the variants, one needs to first decide on the amount to be saved regularly and the term of the plan. The minimum cover in both the cases is the higher of (a) five times the annual premium and (b) half the number of years of the policy term multiplied by the annual premium. The difference between the two options is in the death benefit. In Future Protect, the entire sum assured is paid as a lump sum upon the death of the parent. In addition, the insurer also pays the nominees a sum equal to the premium amount multiplied by the number of outstanding premiums. For instance, if a person who has a 20-year plan with an annual premium of Rs 50,000 dies in the fifth year, his nominees will be paid Rs 7.50 lakh (Rs 50,000 x 15) in addition to the sum assured. The nominees can also choose to take this amount in equal instalments payable semi-annually over the next five years.

In the Assure Wealth option, the higher of the sum assured and the fund value is paid to the nominees when the insured dies and the plan ends. On maturity, the insured gets the sum assured in both the variants—either as a lump sum, or in pre-specified instalments over five years, or as a mix of the two.

You can choose among seven fund options with varying degrees of equity exposure. The Dynamic Floor Fund option would suit those who are not good at switching funds as it would automatically try to maximise equity exposure in bull markets, and actively trim it to limit the downside risk in falling markets.

Plan continuity
Your policy will continue even if you stop paying premiums any time after three years if you have the minimum fund amount specified by the insurer. 

Costs
The upfront cost, the premium allocation charge (PAC), is based on the term of the policy and the premium amount. The maximum PAC in the first year for a policy of 15 years or longer with a premium of up to Rs 24,999 is 36 per cent of the premium. The figure falls to 14 per cent of the annual premium from the second year. There is no PAC from the eleventh year. 

The administration charge for annual premiums below Rs 1 lakh (nil for higher amounts) is Rs 75 per month in the first year and Rs 40 per month from the second year. Policyholders cannot surrender policies or partially withdraw money from their fund during the first three years. If they withdraw money in the fourth year, they will have to pay a charge of 3 per cent of the amount withdrawn. This charge becomes 2 per cent in the fifth year and 1 per cent in the sixth year. There is no charge on withdrawals the seventh year onwards.

Performance
Kotak is one of the few insurers that declare their investment portfolio every month. On 30 September, the fund's equity exposure of 93.46 per cent was diversified across 18 sectors. The banking, oil and gas, and capital goods sectors had 38.76 per cent of its corpus. 

What to do
While buying the Kotak Headstart Child Plan, make sure that the very purpose of investing in a child plan is not defeated. Assure Wealth is not much different from any other unit-linked insurance plan and has little that specifically meets a child's needs. Future Protect is more expensive in terms of mortality charges, but better fulfils the objectives of a child plan. You can stop paying premiums after three years, but it is better to keep adding to the corpus for your child by paying them through the term.