One of the best ways to secure your children’s future is to gift them a good child insurance plan. By providing the needed financial support and stability, these child plans help parents realise the goals they set towards their children. These plans ease the expenditure to be incurred on children’s education, marriage, or buying a house (parents aspire to buy a house for their children by contributing at least the down payment).
By setting money aside for a good child plan, parents can accumulate a sizable corpus over a period of time. The money realised can then be used to fund important events in the child’s life.
Child insurance plan variants
The two variants of child insurance plans are market-linked policies or unit-linked plans (ULIPs) and traditional or endowment plans. In case of the former, policyholders invest in debt and equities. ULIP schemes usually have lower allocation and ULIP charges. You may expect 4-6% annualized returns from any ULIP scheme.
Traditional plans focus on only debt investments such as corporate bonds and government securities. It is important to check the bonuses and type of bonuses you are eligible for. Usually, bonuses start accumulating from the second policy year and make a substantial addition to the corpus. If it is a cash bonus, check the options allowed with it. In case of reversionary bonus, find out if it is simple or compounded.
Factors to consider while selecting a child plan
Various child insurance plans are available today with varied features. It is important to scrutinise and draw comparisons between the different features of different policies, and choose a policy aligned with one’s needs, objectives, and risk appetite.
Essential features to consider are:
Expected requirements
Planning for your child’s future must begin at the earliest, as you get optimal returns and the child gets the money regardless of the circumstances.
The two main needs parents need to plan for are their child’s education and marriage. It helps to take into consideration the time and year that funds will be required for these events, and ensure that the policy’s maturity amount suffices to meet these future needs comfortably. Apart from academic purposes, the plan must also provide for extra-curricular interests/talents like music, sports, etc.
Inflation is a crucial consideration while purchasing a plan and deciding the amount of expenses. It is good to account for a 5-7% inflation rate.
Flexibility
Child insurance plans must permit partial withdrawals. This helps address any urgent needs without disturbing the income matrix and regular expenses. Also, the flexibility to switch between funds lets you leverage favourable market conditions while also offering the necessary protection from market vicissitudes.
Comparing investment redirection and free switches permitted in a year offers the freedom to plan finances in a more streamlined manner.
What are riders and why are they important?
A comprehensive plan is an excellent idea while planning your child’s future, as it covers all possibilities. Riders help achieve this. A life insurance rider is an add-on that enhances the primary plan’s cover if a certain event occurs.
Two of the most important riders that significantly enhance the child plan’s value are:
Premium waiver
Most child insurance plans offer the premium waiver benefit as an essential feature in the primary plan or as an option. In the unfortunate event of the policyholder’s demise, the insurer pays out a lump-sum as death benefit, waives off all future premiums and continues funding the insurance policy until maturity. The child receives the money at specific time intervals defined in the policy. This ensures that apart from the death benefit paid, the maturity benefit set for a certain age remains the way it was originally planned.
Accidental death benefit
Over the child plan’s term, one can safeguard against accidental death or disabilities arising as a result of an accident. In case of accidental death or dismemberment, this rider pays out an amount usually of the same value as the sum assured. The primary child plan will go on and pay the sum assured on maturity.
Additional term insurance plan
This does not mean taking a term insurance plan in the child’s name, it means taking an additional term insurance plan in your own name to protect your child’s future. For instance, if you feel that your child’s future education or marriage will cost around 20 lakhs, consider taking the same amount as additional term insurance. This would cost approximately Rs. 5,000 annually, for 30 years age. It makes sense to take this for a 20-year period after the child’s birth so that it comes to use at the right time.
