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]
