A Primer on Child Insurance Plans in India

Investing and saving for your children’s future is considered one of the most important financial goals by parents in India in their overall financial planning. The bundle of joy brings you a lot of responsibility and if you play your cards well, your child can have a happy future. Child insurance plans in India can help you save money for your children’s future goals like education and marriage. Let’s check how they work.

What are child insurance plans ?

Children’s insurance plans in India are regular life insurance policies that are designed in such a way that they meet the needs of your children financially when the need arises. The need arises according to the goal based investing strategy you have adopted so make sure the maturity happens in the year the goal materializes.

Such products help you save money regularly over a period of time.  The money is invested to grow over a period of time and the insurers payout a lump-sum when the maturity happens. At the same time they also provide a cover on death.

Note that such plans can be purchased on the life of any of the parent and you can make the child as the nominee.

How do they work ?

The most important benefit in children’s insurance plans is a clause built in that if you, the parent were to meet with an unfortunate event, your child’s needs would still be taken care of. So essentially the child insurance plan is able to provide a life cover for the financial needs of your children. In a layman’s term, on death of the parent, a lump-sum money is paid out to the child.

And now for the best feature of child plans in India which no other product has – the child insurance plan will continue till maturity after the death of the parent and all the future premiums will be paid out by the insurance company ! This unique feature is called Waiver of Premium.

On maturity, a guaranteed lump-sum of money is paid out. So the payout happens at two stages – once on the death of the parent and another on maturity. There are some child insurance plans that will give payouts at regular intervals as well. The idea here is to make funds available when your child needs it, be it for marriage or education.

What is very important to have in a children’s insurance plan is the waiver of premium rider available. Make sure you have it. In the event of death of the parent or disability, future premiums will be paid by the insurance company.

Here is the same explained in a diagram.

Types of Child Insurance Plans

There are two types of such plans in India – endowment based and ULIPs (Unit Linked Insurance Plans). The latter is called child ULIPs.

Endowment plans depend largely on the insurer’s performance – if your insurance company generated profits and gives is out for you, then your fund value grows. So here you have to depend on the bonus given out to you. As these invest in debt products, do not expect spectacular returns from child endowment plans.

Child ULIPs, sold heavily in India, are instruments that take advantage of equity investment and hence carry risk with them which gets evened out if you stick with them for a longer duration. Child ULIP plans have high entry charges associated with them so the amount of your money invested is less in the initial years than in the later.

There are many fund options available to the investor – from conservative to aggressive. So a child ULIP plan allows you to invest your money 100% into equity to become aggressive and 100% into debt to become very conservative. You could choose any of the fund options that the insurer provides to you and even switch between these funds.

Returns from such child insurance plans are always better as they take advantage of long term investing. Pick the child plan which suits your risk profile.

In both types of plans, if the parent dies, the life cover value is immediately paid out by the insurer to the nominee and all future premiums are paid by the them and not by the family. At the end of the policy period, the family would get an equal amount of live cover along with bonus in case of endowment plans and the final market linked fund value in case of ULIPs.

At maturity, in both types of plans, the final amount if paid out to the parent and it is up to the parent to utilize this for his child.

Steps in buying

To buy a child insurance plan, follow these steps :

1. First decide on the term of the plan depending on when your child needs the money.
2. Calculate the amount of money needed.
3. If term is less than say 8-10 years or so, go for endowment plans.
4. If term is more than 8-10 years or so, go for ULIPs. In this case, start with the most aggressive fund.
5. Decide on the amount of life cover needed – sit with your financial planner to sort this out.
6. Compare various children’s insurance plans before you finalize and then select one.
7. Stay with it for the long term; in case of  ULIPs, switch in and out when desired.
8. When you are near to your target, move to the all debt investment option.

Though this looks simple, it really can be a very involved task.

Is this the best way to save money ?

Looking at insurance as an investment is not really a wise idea, that is what financial planners will tell you. But then ask the insurance advisors and senior management at insurance firms and they go gaga over this product. They argue that this is a guaranteed product that provides money when your child actually needs it.

The debate over whether a combination of  ‘mutual funds and term insurance’ being better than ‘insurance as an investment’ is a very old. Many people still make moolah discussing this on TV everyday. So I would not get into that now.

If you already have such a product, it might make sense to understand it completely. So that you can decide what to do with it in combination with your overall financial plan. For those who are contemplating taking such plans, TheWealthWisher Financial Planners recommend an avoid.

What’s your take dear readers ?