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ALL PARENTS dream that their child gets the best possible childhood and a safe and secure future. Yet sometimes due to sheer negligence or laziness, parents are unable to offer their children a well laid out financial platform to pursue career ambitions. Delayed planning, insurance experts point out, has been one of the key reasons contributing to this. With the average cost of pursuing higher studies going up significantly in recent years, the importance of having a perfect financial plan to secure your child's future has become essential.
The other area which requires maximum attention and planning from the parent's side is marriage, the cost of which has also increased significantly. The market today is flooded with child insurance plans, some even providing coverage from the day a child is born. To help you make the right choices, here's a ready reckoner on child insurance plans - and what you need to know for your own due-diligence.
STEP BY STEPAs a policy shopper, your first step should be to identify and prioritise your goals and the monetary value attached to them. In short, you should be able to make estimates of the amount you intend to spend on your child's education or marriage. "This will help you choose the premium amount and the policy term," says Yashish Dahiya, CEO of Policy Bazaar, an online insurance brokerage firm.
After you zero in on the time frame, you should then work with your financial planner or on your own about what would be the annual investment required to get the desired sum of money at maturity. "Most of the illustrations by insurance companies are based at 6% or 10% return assumption. Choose 10% if you are an aggressive investor and 6% if you are a conservative investor," says Sanjiv Bajaj, joint managing director, Bajaj Capital.
Last but not the least, you must ensure that the policy you are buying is on the life of you (the parent) and must have a waiver of premium built-in to ensure continuity of future premium, even in case of your death during the term of the policy. This will eventually assure the corpus for your child at maturity under any circumstances.
An ideal child insurance plan, insurance experts say, should be started from 90 days of the child's birth - the earlier one starts the lower the risk and higher the investment period. A minimum tenure of seven years is considered important for the plan.
READ BETWEEN THE LINESInsurance brokers say one should consider a child endowment plan if his risk profile is low and he wants the plan to mature at ten years. Though the downside is low returns, but it covers one against uncertain market conditions. Similarly, one must look for a unit-linked child plan only if the risk profile is moderate to high and remaining invested for more than ten years is possible.
However, it is advisable to derisk this plan by shifting funds from all-equity to safer funds when three years away from maturity. Brokers say one should be more careful examining the features of a child plan. For instance, since a child has no dependants, buying a plan in their name makes no sense. "Yet if you want to buy a policy in the child's name, the waiver of premium rider should be attached," advises Dahiya. The rider ensures your child doesn't have to pay premiums on your death and he still enjoys the policy benefits.
Apart from these, you must see that the policy's term is flexible and matches the education or marriage milestones of your child's life. "As such, a plan which has higher allocation charges and low returns should be avoided," says Ashwani Mehra, vice president, SMC Insurance Brokers. Unlike other policies, most children's plans require premiums to be paid for the full policy term. So if you stop paying premiums after three or five years, the policy could lapse unless you inform the insurer in writing or it will have a low corpus at maturity. "In all, you may miss out on the loyalty additions that improve the overall return on maturity in many plans," says Dahiya.
Children's plans are usually costlier than other types of market-linked plans. The primary reason for this is the mortality charge levied on the sum assured and the value of the future premiums that the insurer is liable to pay if there is a claim. This mortality charge is essential as it provides life cover. One can however go for direct investments and buy a pure term insurance with a high cover as an option. Typically, it will work out more effective, but one needs discipline.
On the whole, an equity-based plan - with a capital guarantee feature - should be favoured so that your money is not subject to volatility of the capital market. "Usually, people plan this through investment routes like mutual funds and fixed deposits, which is not ideal, as the child's goals are certain and need to be met, even in the event of death of parents," says Bajaj. His rationale is that in such a situation only the fund value accumulated till date shall be paid off to the individual in case one has opted for an investment route, whereas in case of a child insurance plan, the child will get the corpus as planned earlier by the parents.
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