Sanjay and Aruna want a secure future for their two-year-old daughter, Shelley. Therefore, they set aside Rs 15,000 every year to invest in one of the children's schemes offered by the Life Insurance Corporation of India.
"While the scheme provides tax relief, it ensures a better future for my child," says Sanjay.
His concern is shared by many parents who systematically put aside a part of their income to invest in children's schemes offered by different insurance companies.
But Sanjay has a word of caution for them. "Emotions run high when parents plan for a child's future. And chances are that one gets swayed by insurance agents' pitches. However, before investing in the future of your child, it will be wise to let one's head, not heart, rule," he says.
Children's insurance can be broadly divided into two categories:
Apart from the public sector player Life Insurance Corporation of India, a lot of private players have entered the field. Yet, while buying children's plans, people tend to bank on LIC more than its private counterparts.
Let's take a look what schemes LIC has on offer for children:
1. Jeevan Anurag is a profit plan meant to take care of the educational needs of children. The plan can be taken by a parent on his or her life.
Benefits are payable at pre-specified durations irrespective of whether the life assured survives to the end of the policy term or dies during the term of the policy.
In addition, this plan provides for an immediate payment of basic sum assured amount on death of the life assured during the term of the policy.
Assured benefit Payment of 20 per cent of the basic sum assured at the start of every year during last three policy years before maturity.
At maturity, 40 per cent of the basic sum assured along with reversionary bonuses declared from time to time on full sum assured for the full term and the terminal bonus, if any shall be payable.
For example, if the term of the policy is 20 years, 20 per cent of the sum assured will be payable at the end of the 17th,18th, 19th year and 40 per cent of the sum assured along with the reversionary bonuses and the terminal bonus, if any, at the end of the 20th year.
Death benefit
Payment of an amount equal to sum assured under the basic plan immediately on the death of the life assured.
2. Another popular LIC policy is: Komal Jeevan
This is a children's money-back plan that provides financial protection against death during the term of the plan with periodic payments on survival at specified durations. This plan can be purchased by the parent or the grandparent for a child aged from 0 to 10 years.
Commencement of risk cover
The risk commences either after two years from the date of commencement of policy or from the policy anniversary immediately following the completion of 7 years of age of child, whichever is later.
Premiums
Premiums are payable yearly, half-yearly, quarterly, monthly or through salary deductions, as opted for, up to the policy anniversary immediately after the life assured (child) attains 18 years of age or till the earlier death of the life assured. Alternatively, the premium may be paid in one lump sum (Single premium).
Guaranteed additions
The policy provides for guaranteed additions at the rate of Rs 75 per 1,000 sum assured for each completed year. The guaranteed additions are payable at the end of the term of the policy or earlier death of the life assured.
Loyalty additions
This is a with-profit plan and participates in the profits of the corporation's life insurance business. It gets a share of the profits in the form of loyalty additions, which are terminal bonuses payable along with death or maturity benefit. Loyalty addition may be payable depending on the experience of the corporation.
3. Another LIC plan is Jeevan Kishore, an Endowment Assurance Plan available for children of less than 12 years. The policy may be purchased by any of the parent/grand parent.
Commencement of risk cover
The risk commences either after two years from the date of commencement of policy or from the policy anniversary immediately following the completion of 7 years of age of child, whichever is later.
Premiums
Premiums are payable yearly, half-yearly, quarterly or monthly throughout the term of the policy or till earlier death of child.
Bonuses
This is a with-profits plan and participates in the profits of the corporation's life insurance business. It gets a share of the profits in the form of bonuses. Simple reversionary bonuses are declared per thousand Sum
Once declared, they form part of the guaranteed benefits of the plan. A final (additional) bonus may also be payable provided policy has run for certain minimum period.
"After hearing about this policy from my insurance agent, I wasted no time in going for it," says Sanjay Mukherjee, 43, a pharmacist working in Kolkata. He and his wife Irani have started investing for their son, 14-year-old Sreyas' future. Like many of his generation, Sanjay does not have much faith in private insurance companies and feels, "It is always wiser to settle for our good old LIC as far as insurance is concerned."
According to Mohua Roy, an LIC agent from Kolkata, "This particular plan enables you to choose from a wide range of premiums. Once you finish calculating how much you can set aside for your child every month, you choose the plan, put your money in it and forget all about it till you start reaping the benefits."
For convenience, she adds, premiums are payable yearly, half-yearly, quarterly or monthly and this shall cease on the death of the life assured. Premiums are waived on death of the proposer provided this benefit is availed.
Among private insurance companies, HDFC Children's Plan provides the following:
Like HDFC, another children scheme gaining popularity is the Prudential ICICI Child Care Plan.
Being an open-ended fund, Prudential ICICI's CCP is designed to promote savings for children's future.
The fund offers a Study Plan and a Gift Plan. While the Study Plan is to be managed as a debt-oriented fund (investing up to 85 per cent in debt and the balance in equity), the Gift Plan is to be balanced (up to 60 per cent in equity and the balance in debt).
The fund charges an entry load of 1.5 per cent under the Study Plan and 2.5 per cent under the Gift Plan.
Unlike other children's savings plans, this fund has no lock-in period and investors can withdraw money by redeeming their units any time.
However, the fund discourages early redemption by charging an exit load of 2.5 per cent if investments are pulled out within three years, on either plan. The fund will levy an exit load of one per cent, for investments held for three years, but withdrawn before the beneficiary child attains 18 years of age.
Young parents, Jhimli and Amritanshu Datta, bought the Prudential ICICI Child Care Plan for their three-year-old daughter Titir primarily to secure her future. "Besides, the fact that the plan offers some tax exemption to us is as an additional advantage," says Amritanshu.
Insurance and investment consultant Jigessh Patel says, "Children's insurance schemes are broadly classified as unit-linked plan and traditional plan.' In unit-linked plans, one gets the option of investing in equities and in government securities. These plans have more flexibility and good returns."
"In case of traditional plans," says Patel, "one gets fixed returns along with fixed bonuses. Also, returns are less in long term."
However, he adds, "Those who are uncomfortable with the idea of investing in equities, prefer traditional plans."
By investing in children's schemes, parents can get tax exemption up to Rs 100,000 under 80C.
How to buy
Coming to the crux of the matter: how to buy these policies. There are four basic ways of purchasing insurance policies. These are:
Buying from individual insurance branches -- Step in to any of the insurance branches and meet the policy purchase/sale desk. For instance, in case you want to buy LIC's Jeevan Kishore plan for your daughter, visit any of the LIC branches across the country to buy it.
Buying from banks -- Most nationalised as well as private banks have tied up with insurance companies and one can buy the policies of their choice from any outlet. For instance, in case you want to invest in ICICI Child Plan, all you need to do is walk into any ICICI Bank branch and ask for the policy form.
Buying online -- Many private insurance companies provide the option of filling in application forms and even paying the first premium through credit/debit cards online. (For example, you can buy any of the HDFC children's plans by clicking here: http://www.personalfn.com/insurance/activitycentre/applyonline/index.asp )
Buying through agents -- The most convenient mode of purchasing an insurance policy is buying through agents.