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WHAT'S the biggest financial commitment of a parent today? At least two out of three say: "It's to meet the rising costs of their child's education." The fact is that most financial planners say that as inflation rises, the first thing to get impacted is the education sector. "Planning for the child's future is an important step. Child insurance plans are one of the tools that help parents secure the financial future of their child. Children's insurance policies have always been popular in India, but their significance has gone up of late due to rising costs, particularly in education, says Aviva India associate director Vishal Gupta.
Earlier, the trend was that a policy was taken in a child's name, which was a simple money-back plan. Now, parents take a term cover in their name, which would be replaced if there is any loss of income due to the untimely death of any of the earning parents. So, it has the twin benefits of investment and protection, says Pranav Mishra, senior VP & head products, ICICI Prudential Life Insurance.
How do these plans work?
Most of these child insurance plans aim to meet your financial needs. For example, ICICI Prudential Life has three variants under the SmartKid plan. These insurance plans provide you with funds at pre-fixed intervals, which will help you meet your child's financial needs at different milestone years. In addition to this, if a parent signs up for an income benefit rider, the child gets 10% of the sum assured till the child reaches his/her milestone years, which compensates the income loss. Similarly, if you have a Unit Linked Insurance Policies (ULIP)- linked endowment plan in your child's name, you can prematurely withdraw 20% of the sum assured after 5 years from the effective date of the policy.
In the case of Aviva's Little Master Plan, you can avail of the benefit of premium waiver. In case of a parent's death, all future premiums are paid in a lump sum to take back as partial withdrawals during the last five policy years. If the parent opts for a comprehensive health benefit rider, upon contracting 18 listed illnesses, your child can avail of the above benefits. Similarly, if the parent opts for an income-benefit rider, in case of the death of the parent, the plan provides a regular pre-determined income at every future policy anniversary to meet the present education expenses. These are either conventional endowment plans or ULIPs, which aim to generate handsome returns over and above the insurance cover for the earning parents. LIC too offers much varied & comprehensive child insurance plans to cater to these requirements.
Are they worth the money?
There are various savings instruments available like PPF, MFs, shares, gold, real estate, etc. Adds Mr Gupta, "The insurer pays the sum assured to the nominees immediately after the demise of the parents. Additionally, the insurance company starts putting in the premium amount into the same plan on behalf of the policyholder.
This money keeps growing and is given to the nominee once the policy matures. However, financial planners have a different take. They say a child plan is nothing but an endowment policy, which could either be a ULIP or a conventional plan. Touchstone Wealth Planners certified financial planner (director) Rishi Nathany explains: "I would suggest an investor should go for a MF. Insurance is any day costlier."
A parent should go for a term policy be it a working father or a mother, on whose income the child's future is dependent. That will take care of the child's financial needs in case of untimely death of any of the working parents. Then, for the child's future, you should create a specific financial plan through systematic investment planning (SIP) in mutual funds (equity/balanced).
Most parents start planning for their children over 10-20 years before their milestone years. Now, equity is one of the asset classes that generates handsome returns over this time span, he adds. If you are a risk averse investor, you can look for a balanced fund or MIP structure to invest in MFs.
Kotak Asset Management's Kotak Star Kid aims to provide for a parent's goal of creating wealth for his/her child, through the SIP route. Explains Kotak Asset Management CEO Sandesh Kirkire: "Under the Star Kid Plan, which comes with an insurance component, if there is a calamity and you are not able to fund your SIP, the scheme will take care of the remaining unpaid SIPs." But then, nothing stops an individual from separating his investments and risk needs. A pure term cover from an insurer coupled with investments from top rated equity/balanced funds should do the trick.
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