Opt for child plans that offer waiver of premium

Given the rising expenses and the high cost of education, saving for children is becoming increasingly important. Child plans offered by life insurance companies are one way of doing this. Under revised guidelines, insurers are considering launching products to meet various needs in this regard-— child care, education and marriage expenses.

In the case of a child plan, the parent contributing the premium is the insured life, while the child is the beneficiary. The inbuilt benefit that waives all future premia, along with a fixed sum assured to the beneficiary in case of the demise of the parent, is the biggest attraction towards these plans.

Typically, child plans are used to save for goals such as higher education or wedding expenses. They combine a component of savings with insurance. In case of traditional child plans, the payout matches the requirement. For example, for a typical child plan, payouts start when the child turns 13, and continue till he/she is 21. The percentage or amount of payout is designed to meet expenses such as school or tuition fees and, later, higher studies.

A combination of the same benefits can also be achieved by purchasing pure term insurance (to insure the parent) and investing in mutual funds/fixed deposits on a regular basis, says Gaurav Roy, co-founder, Bigdecisions.in. “Parents who are more financially savvy may opt for this, as they may be able to structure these themselves or with the help of a financial advisor. This gives more flexibility in terms of moving the corpus around in case of bad fund performance or low interest rates,” he says.

However, Yashish Dahiya, co-founder and chief executive of PolicyBazaar, says unlike a term insurance plan, a child plan is specifically for a child, allowing only him/her to avail of its benefits. As a result, the chances of misuse of the corpus are reduced. “While term plans provide a good cover at a reasonable price, these do not take into consideration the specific needs of a child,” he says.

A child plan has a lock-in for a certain period and the costs of breaking this lock-in may be high, Roy says. By comparison, mutual funds have no lock-in, while Public Provident Fund has a 15-year lock-in period.

A deterrent could be child plans are considerably more expensive than Ulips or a combination of term plans and mutual funds, says Dahiya. This is because of higher mortality charges. “Child plans are type-II Ulips, where both the insured amount and the fund value are given to the nominee. Type-I Ulips (regular Ulips) give only the higher of the two sums and, therefore, have a lower mortality charge. Ensure you opt for a waiver of the premium, if this isn’t already included in your policy,” Dahiya says.

[Source: http://www.business-standard.com/article/pf/opt-for-child-plans-which-offer-waiver-of-premium-114080701113_1.html]

New children's money-back policy: Not a great plan

Child plan offered by insurers usually allow you to plan for your children’s education needs in the future while also providing a risk cover on your life. If you, the parent, unexpectedly pass away, the child’s future is secured by way of the proceeds from the claim.

But LIC’s new children’s money-back plan is quite different. This plan covers the life of your child. In the untoward (and unlikely) event of the child’s death, the parent gets the sum assured. If the child survives, you get a predefined lumpsum.

Plan features

This Child plan is available for children of the age up to 12 years and has an insurance as well as savings component. The minimum sum assured is ₹1 lakh. By design, this policy will mature when the child turns 25. For instance, if the child is 10 years old when you take the policy, the insurance term will be 15 years. In case of death of the child during the policy term, the sum assured — either 10 times the annual premium, or 105 per cent of premiums paid, whichever is higher — will be given to you, the parent, along with any bonus.

The company guarantees two benefits for the child on surviving the policy period. One, your child will receive 20 per cent of the sum assured on the completion of 18 years, 20 years and 22 years. Two, a maturity benefit equal to 40 per cent of the sum assured plus any reversionary and final bonus declared by LIC is guaranteed on maturity of the plan. The bonuses depend on LIC’s discretion and the reversionary bonus will accumulate only a simple interest basis.

Now, it is quite unlikely that anyone would like to claim the insurance benefits on the death of one’s child. But what if an untoward incident happens to you?

Well, this policy does offer a ‘premium waiver benefit’ in case of the proposer’s death during the policy term.

However, this is a rider, requiring you to shell out additional premium. The rider is only given to parents between the age of 18 to 55 years. Death of the proposer within the first 12 months of the policy issuance or within 12 months of policy renewal will not entitle one to the benefit.

Insurance is usually recommended only for earning members of a family. In any case, hardly any parent would like to ascribe a monetary value to the life of their child.

Our take

To add to this, the features of the plan are unfriendly to the investor. One, most insurance companies give a premium waiver benefit on children’s plans so that the child can continue to enjoy Child plan benefits even if an untoward event happens to the parent. But this scheme offers life cover for the child and requires you to pay additional premium for your own life cover.

Two, availing of the rider carries conditions too. The plan specifies that if the child is below eight years, there will be a waiting period for the death cover.

Further, the plan’s returns are also quite low.

The benefit illustration estimates the net return at maturity at about four per cent, assuming a gross return of 8 per cent.

If you have a 10- or 15-year term in mind, a combination of a pure term cover for the parent plus an investment in balanced funds will be a much better way to build wealth for your child. If you are a conservative parent with a girl child, you may also look at the Sukanya Samriddhi scheme or else consider the PPF.

[Source: http://www.thehindubusinessline.com/features/investment-world/beyond-stocks/lic-new-childrens-moneyback-policy-not-a-great-plan/article6996112.ece]

Polishing the future of the “Diamond” of your life

With the ever rising cost of education, inflationary increase, luxurious lifestyle pattern etc.; saving for children's better and secured future has become an important goal for the parents. All parents dream that their children get to pick the best possible educational institutes or career options and excel in life without any financial constraints. As parents we can always postpone or even compromise on our comforts such as buying a home or a car but we cannot postpone our child's education. Planning allows parents to support children with special needs required to fulfill their hopes and dreams in life.

Identify the Needs

As you identify new needs, you will have to revise your planning structure to address them. And as and when these goals are achieved, you will need to define new goals. So it’s a continuous process of better and sound future planning. To plan the future of your child, it is important to calculate the amount of fund needed for education, the number of years for which cash flow is needed, and how far we are from achieving the desired goal from today. Planning ahead and making investments towards child's secure future at an early stage are the critical success factors in realizing this goal.  

Child Insurance Plan

Child plans are one such way of securing your child's financial future, and they are different from mutual funds or other insurance plans in many ways. Child plans are insurance policies which are either traditional policies or unit linked insurance plans. Typically, in child insurance policies one parent is specified as the policy holder and the child is specified as the nominee. The most important benefit in children’s insurance plans is that even if the parent were to meet with an unfortunate event your child’s needs would still be taken care of. If the policy holder survives the tenure of the policy, periodic payouts are made at predefined intervals.

Importance

Life insurance policies for children are more affordable than any other life insurance policy. Investment in children insurance plan is somewhat similar to an ULIP investment. The only difference is that the investors are the parents while the final beneficiary is the child when he/she grows up. In case the parent dies, a lump-sum amount is given to the family but the child plan doesn't terminate itself. It acts as a corpus that remains intact till its exact maturity date. The returns on insurance policies for children are tax-free and can save you a lot.

Conclusion

Most of the parents opt for the child plan due to the fear of lack of financial security, untimely incidence such as death which can seriously hamper your child’s future. A child plan will make the parent continue investing year after year, thus ensuring that he saves enough for the kid. Insurers say child plans are structured to meet the needs of the child and the waiver of premium feature in a child plan is the key feature of it. When buying child insurance, search for policies that emphasize on cash value. Most importantly, buy insurance while your child is young to take advantage of low rates and high returns.