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The day there takes a birth in the family, the
parents, relatives and the grandparents make up their mind to start saving
for the child’s future. Generally, the savings happen as a lumsum amount in
the form of fixed deposit in a bank or post office. Parents also consider
buying an insurance policy to take care of children needs in the time to
come. |
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A child is someone who is totally dependent on
you - physically, financially and morally. If something were to happen to
you in your child's early years, it would be a major hindrance for her/him.
It is always wise to consider the consequences of your untimely demise.
Children plans in no way should be thought about as a plan bought in the
name of your child. They are the plans designed to provide a guaranteed
lump sum, on maturity and ensure that the required sum of money is there
for the kids at the right time in case of parent’s demise |
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A child insurance plan is a regular premium life
insurance product designed to meet the financial needs of your children -
be it higher education, marriage, establishing them while starting a career
or a business, or any other need. Through this policy, you save regularly
to meet your children’s needs, and at the same time their financial needs
are taken care of should something unfortunate happen to you. They can be
purchased on the life of any one of the parents with the child as the
nominee. |
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The one thing unique about the child insurance
plans is that in case the parent dies, the insurer pays the sum assured
immediately to the nominees. However, unlike other plans, the policy
continues and the insurance company starts putting in the premium amount
into the same plan. This money keeps on growing and is there for the
nominee on maturity. Thus it ensures that the funds are available to the
child at the desired age. |
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You may choose between an endowment and a
unit-linked insurance plan. An endowment plan is a with-profits or bonus
based and hence the returns hinges largely on the profits and surplus
generated by the insurer. The returns being a function of the bonuses and
since the funds are not exposed to equity markets, the returns would
normally be around 6 per cent. It works more like a fixed deposit in a way
that the returns in the form of bonuses once attached to the policy becomes
guaranteed and is definite to be paid on maturity. |
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Whether it is an endowment plan or a unit-linked
in nature, there can be two variants of children plans. One, in which there
is a staggered payment made to your child when he or she reaches a certain
age. For example, 20 percent is paid on 21st birthday, 20 percent on 24th
birthday and the remaining 40 percent when the policy matures. In the
second variant, one may choose to get a lump sum amount at the desired age. |
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Insurance should always cater to a particular
need. No one plan can ideally satisfy all your needs at various stages of
life. A term insurance plan is bought with the objective of ‘income
replacement’. Similarly, a mortgage insurance plan is for covering your
home loan portfolio. Buying a unit-linked insurance plan also does not
fulfill the objective of meeting the child’s needs. Only a child insurance
plan ensures that a certain sum of money is for the child at the desired
age, not earlier or later. |
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Also, a normal life policy would pay the
nominees a certain sum of money on the demise of the policyholder. The
family circumstances and the age of children might not require such a huge
amount at that time. There is a possibility of this money being utilized in
other spending. |
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Other investment avenues like mutual funds,
equities do have the potential to deliver a higher maturity amount.
However, all those instruments need a regular influx of funds till the end
of the term. If the investor dies, this process gets hampered. A lot of
people would argue at this stage by saying, that a pure term insurance plan
would satisfy the remaining objective. Agreed, that a combination of a term
plan and mutual funds investing is a nice idea but it is not a panacea for
all needs. Getting a sum assured of say 20 lakhs at a time when the kids
are still young has a higher probability of being spent on other
expenditures. To ensure that the right amount is there for the kids at the
right time, child plans is the answer. |
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For example, one needs to accumulate a certain
sum, say, Rs 20 lakh for the child, aged 1 year, when the kid reaches 21
years of age. Through mutual funds at a conservative rate of 12 per cent,
he needs to invest annually Rs 25,000. However, to accumulate such amount,
one needs to be alive and death may result in jeopardising this objective. |
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The important thing to consider here is the cost
involved. The children plans undoubtedly are costlier than a normal life
insurance plan. This is mainly because of the risk – benefit structure of
such plans. |
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For example, for a normal endowment kind of life
insurance plan in which there is a one-time payout of the sum assured on
death would cost Rs 23,575 for someone whose age is 30 for Rs 5 lakh sum
assured over a term of 20 years. In contrast, in a child insurance plan for
the same age, term and sum assured, the cost is about Rs 24,085. This
difference is mainly because of the fact that inspite of the sum assured
being paid to the nominee, the plan does not terminate. The company again
pays an equal amount of sum assured along with the bonuses to the nominee
at the end of term. This is the cost that one has to pay for availing that
added security. |
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Similarly, in a normal unit-linked plan, based
on the same parameters of age and term, the maturity amount would be about
Rs 18.55 lakh on a premium of Rs 36,000 annually. However, a child specific
plan would return 17.64 lakh at the end on a post-cost return of around 8%.
The balance is the cost you pay to ensure the added security. |
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When purchasing life insurance, it's important
to remember that its main purpose is to replace an income that is lost when
one dies. A child rarely has an income and therefore has no reason to get
insured. A lot of people would say in favour of it citing low mortality
costs. To some, it is a great, low-cost way to set money aside for the
future and to make sure the child would have insurance as an adult, in case
an illness later in life makes him uninsurable. |
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However, the very objective of insurance fails
in doing so. Therefore, make sure that the parent is the life assured and
the nominee or the beneficiary is your child. |
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Just in case, you buy that policy in your child
name where the premium is being paid by the parent, one should necessarily
attach the ‘waiver of premium’ rider. Unless the parent paying the premium
avails waiver of premium rider by paying additional premium, the objective
of the plan gets derailed on the death of the parent. |
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Consider the inflated cost of a normal
educational course your child might need to purse in future. Similarly,
arrive at the marriage cost. This would be your targeted savings amount to
be received on maturity. Thereafter, you need to sit with your financial
advisor or agent to work out the amount to be invested and the sum assured.
The term of the plans would differ from company to company. Ideally, the
term should mature i.e. payback at the time when your child actually needs
it. Consider those plans that give you the option to choose the desired age
and are flexible. |
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Plans, which are endowment in nature, ask for
the premium payments till the end of the term. However, unit-linked plans
have the facility wherein you may stop paying premiums after 3 years
premiums have been paid. However, remember that you have bought this plan
with the sole objective of accumulating wealth for your kids. Lesser influx
of funds would mean a lower maturity value. Use this facility only when in
dire straits. |
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Based on the current age of the child and the
age when he/she requires funds, Fix the duration of the plan. |
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Fix the amount of funds to be accumulated at
maturity |
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Get the ‘Illustration benefit’, showing annual
premium amount that needs to be saved at 10 percent annual growth rate. |
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The only variable in the above approach is the
rate of growth. Even if the parent dies, the insurer puts in the same
amount into the fund and the desired accumulation of funds takes place. |
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Waiver of premium – This is one of the ‘riders’
that can be optionally attached to your main policy. Termed differently by
various insurers, the objective of it is the same. And especially in
children polices, it has its marked importance. In the event of death or an
accident that disables one permanently, this rider is available to the
insured parent, where no further premiums need to be paid into the policy.
The existence of this rider ensures that policy runs its normal course till
the maturity. The policy even qualifies for bonuses during these years when
the premiums are not paid by policyholder. It comes at an additional cost
whereas some plans have this as an inbuilt feature and not available as an
option. |
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Money guaranteed at a certain age - The
objective of a children's policy is to ensure that the child receives a
certain lump sum amount of money at a fixed age. Hence, if the parent dies
at an early age, the policy should continue, where no further premiums need
to be paid and the child should still receive a fixed sum of money at a
particular age. |
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Policy should not cease upon death of the
insured parent or guardian - Few policies have the option for the sum
assured plus the bonus to be paid to nominees on death. Ensure that if the
objective of your purchasing a policy is to provide your child with money
at a certain age, your policy does not discontinue in the event of your
early demise. |
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Notes