The very mention of life insurance conjures images of securing one's financial future. Individuals also generally ensure that the financial safety of those who are dependant on them has been taken care of.
Children's plans, which form part of the gamut of life insurance plans, are aimed at securing the child's future.
Child plans basically work like an endowment plan. They are in operation for a certain period after which the beneficiary stands to gain a particular amount, i.e. the maturity amount. How do they work and what do they aim to do?
An illustration will help in understanding things better.
Child plan from Company ABC Ltd
| Age of parent/ guardian (Yrs) | Sum assured (Rs) | Term (Yrs) | Net premium (Rs) * | Maturity Amount (Rs) |
| 30 | 500,000 | 15 | 33,109 | 882,800 |
In the table, an individual, aged 30 years, decides to buy a child plan from company ABC Ltd for a sum assured of Rs 500,000. The child's age is 6 years while the tenure of the plan is 15 years. The basic plan premium in this case works out to Rs 31,857.
The individual can also opt for various riders along with this plan. In fact, it would be especially advisable for him to opt for a couple of them, i.e. the waiver of premium rider (WOP) and the accidental disability guardian benefit rider (ADGB).
The WOP rider keeps the policy alive by waiving all future premiums on the policy in case of an unfortunate death of the premium payer. The ADGB rider too waives all future premiums in case of a disability by way of an accident to the premium payer. The net premium after accounting for the above riders works out to Rs 33,109.
At the rate of 10%, the maturity amount according to the company's illustration for the above plan, works out to Rs 882,800. But take a closer look and you will notice that the said returns of 10% have not been calculated on the premium figure.
The 10% return has been calculated on that portion of the premium, which is net of expenses. The actual returns shown in the illustration therefore, work out to approximately 6.90% if calculated on Rs 33,109 and approximately 7.35% if calculated on Rs 31,857.
Of course, the entire returns are not fully guaranteed and depend on how the said insurance company manages its money.
Child plans are designed in such a way that they mature at a time when an individual needs money for his children's specific needs. For example, in our illustration, the child is currently 6 years old; by the time the plan matures 15 years hence, he will be 21.
The maturity amount of the child plan could be utilised to pay for his higher education or marriage. Individuals need to plan their child's future financial needs with care as the child insurance plan will have to be bought accordingly.
Some life insurance companies have a variation of this plan. They give the maturity amount in phases. Part of the maturity amount is given when say, the child attains 18 years.
Another part is discharged when the child is say, 21 years old while the remaining amount will be disbursed when the child becomes 25 years old. This kind of functioning is akin to the working of a money back plan.
Some life insurance companies also offer unit linked child plans, which aim to offer superior returns through a combination of investments in equity and debt markets. Again, such plans are similar in their functioning to unit linked endowment plans.
Another positive for child plans is that most life insurance companies offer individuals the single premium option. That is, individuals can pay the insurance premium in one go. This is especially useful in case someone wants to gift a child plan to his or her near and dear ones.
All in all, children's plans can add a lot of value to your insurance portfolio. One, they give you a maturity amount when you need it the most to pay for your children's education/marriage and two, by way of useful riders, you do not have to worry about your child's future in case of an unfortunate eventuality.
(The figures used in the illustration above are based on those of an existing life insurance company. They could vary across life insurance companies).
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