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Children are the greatest gift from God and we welcome them with great joy and enthusiasm. Every parent wants to give best to their child in all the aspects, be it education, sports, marriage etc etc. Hence raising a child is in today’s world is one of the biggest financial commitment for the parents. Planning for child future is one of the most important milestones in financial planning and it is prudent for parents to start investing as soon as the child is born. There are various investment vehicles which can help parents to plan for child future goals. In this article we will highlight a popular tool Child Insurance plan which can help parents to secure the financial future of their children.
Child Insurance plan as the name suggest are insurance cum investment plan offered by various insurance companies. Child Insurance plan are designed in such a way that the money is invested regularly and it grows over a period of time and the same can be withdrawn as and when child achieve certain milestone or goal. The plans are for specified time period and parents get corpus for various milestones like Graduation, Post-Graduation, Marriage etc. Most of these plans are structured with inbuilt insurance component for the earning parent so that in case of an unfortunate event (death or disability of the parent), the future goals of child are not affected as either insurer pays the sum assured to the nominee/s immediately after the demise of the parents or waives the future premium(i.e. the insurance company starts putting in the premium amount into the same plan on behalf of the policy holder) and the plan continues.
Child Insurance plans are normally either a traditional endowment plan or Unit Linked Insurance Plan. Traditional endowment plans relatively carry lower risk as the money in these plans is mostly invested in fixed income instruments. In these plans, a fixed percentage of sum assured is paid at regular installments and on maturity the remaining sum assured plus bonus is paid out. These plans are suitable for parents who do not want to take any risk and want to have defined cash flows at regular intervals to meet his/her child future plans.
For e.g – Bajaj Super Cash gain Child Insurance Plan, if it is taken for 24 years and Sum Assured 50,00,000, The plan would provide: 20% of the sum assured i.e. 10,00,000 each on 6th Year (School),12th year (School) and 18th year (Graduation) and 40% + bonus i.e. 20,00,000 + Bonus on 24th year (Post Graduation).
Child Unit Linked Insurance Plan is an insurance policy which provides dual advantage of insurance as well as investment. In these plans, investor has the option to invest the invested surplus amount of the plan in various funds as per his risk appetite. As it is rightly said that equity as an asset class is an ideal investment which will generate best risk adjusted return if investor want to invest for long term say 10 years plus, the ULIP plans allow investor to invest in equity, debt or combination of both. Hence ULIP usually carry higher risk and allows investor to do his asset allocation based on his risk appetite.
In both types of plan, in case of early death of parent i.e. before maturity of the plan, the life cover is paid to nominee and future premium are waived off. And on maturity, the maturity amount + bonus in case of traditional plan and fund value in case of ULIPs would be given to child/family member.
Things you should remember while selecting child insurance plan:
Life Cover: The policy should cover the life of earning parent and not the child.
Inflation: One must keep in mind that the amount invested should be able to beat inflation when individual is planning for long term goal.
Time Period: One must select the policy that matches with the tenure of his goal and the cash flow requirement.
Charges: In case of ULIPs one must look at charges before selecting the policy as high charges will lead to lower return.
Withdrawal: One must stay invested for long term in ULIP and withdraw money only on reaching is goal
Asset Allocation: When the goal is far away, Equity fund can be selected and as you reach near to your goal, start switching money from equity to debt and by the last year of your goal, the money should be switched to debt option completely.
Conclusion: There is always lot of debate over if child insurance plan are good or bad. There is no fixed answer to it, individual who do not have time and financial knowledge and want to save for his child future goals, can invest in Child insurance plan as it gives individual protection against any unfortunate event in life and also pays lump sum amount when the child achieve the milestone age. And any individual who is well versed with finance and have requisite time can select a pure term cover on himself and invest the remaining amount in pure investment products like equity/balance mutual fund or fixed income instruments.
Begin structuring a corpus for your child’s future today! Click here to learn more about our child plan!
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