Planning for your child's future is an important decision in any parent's life. While you may well have a financial plan in place for your own future, it is equally vital that you make similar provisions for your child's future.
The good news is that today there are a variety of products available to parents to provide for the child. Child insurance plans in particular should appeal to most parents because they are tailor-made to fulfil your child's needs.
There are a variety of child insurance plans available in the market today, which can act as a savings tool to secure your child's future.
Child plans help address your child's future education and/or marriage needs. They also provide the capital that your child may need at a later stage to venture into a business. But how do child plans work? An illustration will clarify the same.
Secure your child's future
|
Sum assured (Rs) |
Age of parent (Yrs) |
Tenure (yrs) |
Annual premium (Rs) |
Death benefit |
Maturity amount (Rs)* |
|
100,000 |
25 |
20 |
4,869 |
100,000 |
224,481 |
*Assumed returns @ 10%
The illustration above is for HDFC Standard Life's Children's plan - Double benefit.
The returns could vary across life insurance companies.
Assume you are 25 years old and your child is around a year old. You decide to buy a child plan from HDFC Standard Life Insurance Ltd for a tenure of 20 years with a sum assured of Rs 100,000.
The premium for the said policy works out to Rs 4,869, which is affordable and an amount that you can save from your monthly allowance.
As can be seen from the table, this child plan basically works like an endowment plan. In case of an eventuality to you, this plan will provide your child the sum assured of Rs 100,000. Besides that, it also waives all the consequent premiums payable till maturity and gives your child the maturity amount immediately.
Conversely, on maturity, the policy will provide your child with a lumpsum amount of Rs 224,481 (assuming a rate of return of 10% as per company illustrations)
In our illustration, since this policy matures at a time when your child is 21 year of age, it will prove to be beneficial if you want to plan for say, your child's post graduation study expenses or his marriage.
Luckily for the parents, there are a lot of variations available within the child policies segment:
- For example, LIC's marriage/educational child annuity policy gives you the option of receiving the policy money in 10 half-yearly instalments on completion of the tenure.
- Tata-AIG's 'Assure Career Builder' is a money back plan that gives lump sum money at different junctures in your child's life. This plan gives you 20% of the sum assured on the 18th, 21st and 24th birthday of the child .You get the remaining 40%, alongwith the returns earned on your premiums, when your child is 27 years of age.
Term plans can also be used to secure your child's future. Ensure that you have a term plan for yourself and you nominate your children so that in your absence, the policy proceeds go to your children. Term plans are a cost-effective way of ensuring your child's future. Of course, they cannot replace a savings product like an endowment plan.
As explained earlier, most child insurance policies also come along with a waiver of premium (WOP) benefit. The WOP benefit aims to 'waive' all the future premiums payable in case the proposer (i.e. the parent) passes away.
This not only helps in keeping the policy alive but also ensures your child a decent future in your absence. The WOP benefit can be bought at a nominal cost.
Some life insurance companies have a lower premium on their child plans if the proposer is the mother. For example, SBI Life and ICICI Prudential to name just two, charge a lower premium on child plans, provided that it's the mother who pays the premiums. Look at all your options before you decide to zero-in on any one plan.
Unit Linked Insurance Plans (ULIPs) can also be looked at while planning for your child's future. ULIPs invest the premium amount in market-linked instruments like stocks and government securities.
ULIPs have the 'potential' to generate higher returns since equities as an asset class are equipped to offer better returns over the long term vis-à-vis peers like fixed income instruments and gold. And since planning for child's future is an activity to be spread over a longer duration of say, 15-20 years, ULIPs could be considered. In our view, well-managed unit-linked child plans should give competitive returns.
Many companies like ICICI Prudential and Birla SunLife amongst others offer unit linked child plans.
Of course, ULIPs come attached with a rider- invest only if you have a risk appetite and basic knowledge or understanding of the stock markets. Also, it is important to first inquire about ULIP costs like administration expenses, fund management charges, the commissions given to agents and charges for switching between various ULIP options.
Further, these charges differ across life insurance companies. The costs affect your returns in the long run. So evaluate your options well before you take the leap.
As you can see, child plans of both the endowment and ULIP variety have their own set of benefits; hence it is always prudent for women to have a well-diversified portfolio of insurance plans while planning for their children.
While a regular endowment plan will give you a lump sum at a given point in time, buying a money back plan will ensure that there's an income stream at regular intervals. Similarly, a ULIP with a reasonable equity component is equipped to enhance returns.
To put it simply, you should evaluate all the available options before building an insurance portfolio for your child. The key lies in being aware of the various options and investing in a plan that best suits your requirements.To know how parents should go about securing their children's future and the role women can play in the same, download your free copy of the Money Simplified.
