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Child insurance: How to make sure your child gets funds at the right time

16 February 2017
As a parent, you want your children to get the best education. However, keeping in mind the rising cost of education and the uncertainty involved in the funding process, it is not easy to ensure this unless you have a proper plan in place.
 
 

By Sunil Dhawan

Various investment options such as public provident fund, mutual funds, shares, gold, real estate etc. are self-funded in nature. To build a corpus to fund one's child's education using these options, one has to be alive to keep investing in them. The funding, in all likelihood, would stop if the investor passes away and the goal may not be achieved. One solution to this problem is investing in a child insurance plan. This is also self-funded, but in the absence of parents, the insurer funds the policy. Here's how.

What a child insurance plan achieves
A child insurance plan is designed to meet the financial needs of your children- be it higher education, marriage or helping them establish a business. Anil Rego, CEO & Founder , Right Horizons says, "Investing in child insurance plans ensures that the payouts from such policy and even the sum assured in case of any unfortunate event, are used specifically for the child's needs- it's an investment done for your child's future" Child insurance plans help you save regularly for your child's needs with an assurance that your kids' financial needs would be taken care of in case you meet with an unfortunate event. In the event of the insured parent's death, the plan ensures that the desired sum is given to the child at the desired age. This happens because in the absence of the insured parent, the insurance company starts funding the policy and therefore the saving plan doesn't get derailed.

Related: 4 reasons why Child Plans make good sense
Uniqueness of child plan
This is possible because of the presence of 'waiver of premium' (WOP) feature in most child insurance plans. While choosing a child insurance plan, make sure there is a WOP feature in it. This feature makes the child insurance plans unique because the nominee gets a pay-out from the insurer twice in case of the insured person's death in the following manner. The insurer pays the sum assured to the nominee immediately after the death of the policyholder. However, the policy doesn't terminate after this payment as is the case with other insurance plans.

Instead, the insurance company starts putting in the premiums for the policy on behalf of the policyholder. This money keeps growing and is given to the nominee once the policy matures. Thus, the policy ensures that funds are available to the child at two life stages. In fact, in most such plans, regular payouts occur at different specific ages of the child. , "A fixed amount is received at different points of time which can be mapped and utilized as per the child's educational need." says Rego.

If the insured survives the policy, the sum assured and the bonuses are paid to the nominee as survival benefit. However, in the case of Unit linked insurance plans (ULIPs), the parent receives the fund value.

Saroj Satapathy, CEO, Ideal Insurance Brokers says, "The waiver of premium feature in child insurance plan is important as it offers a lump-sum payment on the death of the policyholder, but the policy does not end. All future premiums are waived and the insurance company continues investing this money on behalf of the policyholder and pays the child at the time of maturity".

Child plan variety
You may choose between an endowment plan and a ULIP as your child insurance plan. An endowment plan is a with-profits/ bonus plan and hence, the return from it depends largely on the profits and surplus generated by the insurer. Since the funds are primarily invested in debt assets, the return in these plans is currently around 5 per cent per annum.

If your risk profile, keeping in mind planning for your kids, does not allow you to take risks through equity exposure, bonus-based endowment plans are more suitable for you. However, if you are willing to bear volatility, Ulips, the returns in which are linked to the stock market, would make sense especially when the child need is at least ten years away. You could choose to stay invested in the equity fund option till you are three years away from the maturity year. Equities perform better over other asset classes in the long term.

The downside
Child insurance plans, because of the 'waiver of premium' benefit, are costlier than other plain-vanilla insurance plans.

Conclusion
Child insurance plans with WOP feature ensure that the child gets the desired amount at the desired age. The insurance element in child insurance plans is what differentiates them from other investment avenues e.g. mutual funds etc that may offer higher returns but would not be able to meet the final objective in case the saver has an untimely demise.

Source: Economic Times

 

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