Child Insurance Plan

Planning for insurance plays a major role in an overall financial plan of an individual. One of the precious gifts in any parent’s life is their children and providing them the best education right from Play school to Post graduation is a key objective for a parent. Insurance acts as a bridge to ensure that your main goal of providing your children with the best education is fulfilled even in your absence.

 

Child insurance plans have always created a buzz with parents. But is this plan really something so special and different from an ordinary insurance plan?

 

What is a Child Insurance Plan?

A child insurance plan is just an extension of a traditional money back/endowment/ULIP plan (There is a life insured, a sum assured for which a premium is paid and there is an investment component which provides you the maturity benefits). In the Indian context, insurance is sold on emotional aspects rather than practical, to which many of us fall prey.

 

Basically, child insurance plans cover the life of the parent (typically the earning parent of the family) while certain policies cover the life of the child and pays the sum assured in case of any eventuality of the life of the insured. The maturity benefits will be paid depending on the type of the plan (for example, money back child plans will provide survival benefits at regular intervals whereas ULIP and Endowment child plans will provide the lump sum amount at the time of maturity of the plan or when the child turns 18 years). But, these policies are very expensive compared to buying term cover and investing in mutual funds.

 

How an agent may try to pitch a child plan to you:

The unique selling points used by agents to sell Child Plans are follows:

 

Premium Waiver Benefit: This is an important feature in case the life assured becomes disabled and is not able to work in future, or passes away. In this case, there would be no liability involved from the family’s perspective and the policy will continue till maturity, as NO premiums are to be paid after the insured parent becomes disabled or passes away.

 

Commencement of risk: Generally if the child is the life assured then he is covered after completing 7 years of age or after completion of 2 policy years from the commencement of the policy, whichever is later.

 

Policy Continues: Some policies do not cease after the insured parent passes away and it continues till maturity. The benefits will be paid to the child upon reaching maturity.

 

Death Benefit: The nominee of the insured parent will get the death benefit for the purpose of education and marriage of the children.

 

Is it really so unique?

No, it is not. All the above mentioned features can appear very beneficial, and people tend to fall for them. But, all these features can be availed through a regular term plan which is very cheap compared to these products.

 

Additionally, the products listed above have lock in periods, while a term plan does not, and can be surrendered as and when required.

 

What’s the verdict?

There are a plethora of child insurance plans in the market. It is important to note that these plans are just an avenue of investment. You would be better off investing in a straightforward term plan, and into mutual funds (for the long term).

 

But before you do go ahead and make your investments, there are two things to keep in mind when planning for your child’s future:

 

Firstly, you need to understand the costs involved when securing a child’s future. The same will not remain constant as the costs rise every year due to inflation and an increase in expenses as the child grows up.
Secondly, the time horizon for the goal should be one of the critical determinants to decide in which avenue the funds should remain invested.
For example, if the children’s education needs is just 3 years away, it would make sense to invest only in debt instruments as they offer fixed income along with capital protection, however, if the tenure is 5 years or more, some allocation may certainly go to equity.

 

To conclude, investing in a child insurance plan without understanding the pros and cons will not help you provide for the stated goal. Consult a Financial Planner to understand the need for such products and more importantly, understand the goal and the costs associated with such goals. The investment product is the end result of a goal and not the goal itself.

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