The ABCs Of Child Insurance Plans

As a parent, it is important to secure your children’s future in terms of educational and other crucial expenses. Child insurance plans are a step in this direction, says Jay Sampat

Parenting brings joy, but with it comes a lot of responsibility as well. It is always wise to plan your children’s medical, education and wedding expenses well in advance. While you may already have an insurance plan for yourself, it is important to secure your child's future with specific child insurance plans. Your children will get the returns when they grow, and the funds can be used for education and other expenses.

One of the ways to ensure this is by keeping an adequate fund ready for every important occasion of his/her education needs. Consider a few startling statistics. A typical engineering course was priced at Rs 1 lakh in 1990 and this went up to Rs 3.2 lakh in 2000. Taking a realistic rate of a 12 per cent rise in fees, the cost would be in excess of Rs 20 lakh by 2020. This makes it clear that planned savings for the child's future are extremely critical.

Fixed deposits, mutual funds and insurance schemes are some of the traditional options available to save for your child’s future. When it comes to insurance schemes, the two options are endowment and unit- linked insurance plans. However, there are a few important issues which need to be considered before you sign on the dotted line.

Child plans may cover either the child or the parent. Experts advise choosing the latter option. Insurance isn’t required for a child because he/she does not have any liabilities and dependents.  Moreover, if you are buying a child insurance plan to take care of your children’s education needs, ensuring that the payouts happen at the right time is crucial.

Ideally, money should be received at important junctures in the child’s educational and career graph. For example, the first payout of 20 per cent can be at 15 years, which goes towards school studies and preparation for professional entrance examinations. The second payout of 25 per cent could take place when the child turns 17, which meets the costs of joining a professional course. The third payout of 25 per cent, at 22 years, could meet post-graduate course expenses. The final payout of 30 per cent could be handed out at around the 25 year mark, when money is allocated for studies abroad, setting up a business or getting married. Whatever payment schedule you choose, ensure that you spend the money only on your child’s education and don’t squander it away.

Certain policies are as cheap as Rs 500-700 per month. Insurers may even permit a person to pay the premium every five years. There are discounts on premiums as well, like a two per cent rebate in case of yearly premium and one per cent in case of half-yearly payment. It also makes sense to take a waiver of premium rider at a nominal cost. This ensures that the policy continues even in case of an eventuality and payments cannot be made.

Costs are another area which merit careful consideration. For example, a policy's administration costs may be moderate, but premium allocation charges or money deducted from your premium towards the agent’s commission may be on the higher side. In many cases, this is in excess of 50 per cent, which can substantially reduce the benefit of low administrative costs. Where guaranteed additions are packaged in by the insurer, the risks are near zero. In such cases, ensure that there are bonuses on the sum assured as well as compounded reversionary bonus. Check if bonus benefits and guaranteed additions kick in every year or only when the children turn a certain age.

Note that under Section 80C of the Income Tax Act, you can get a tax benefit for upto Rs 1 lakh of the premium paid. The amount received on maturity is exempt under Section 10 (10D) of the said Act.

There are some schemes that allow savings for two children with one plan. Also remember, making your spouse a nominee helps distribute the insurance proceeds among your children in case of an unforeseen event.

In case of ULIPs, no loss of investment takes place if there is a profit fund because risks are eliminated. In fact, unit-linked policies can be extremely useful in certain cases. For instance, if the child pursues an expensive extra-curricular activity, the parent can take a unit-linked policy besides the regular one, as the returns in a good year could help meet the prohibitive costs of that activity.

The thought of buying life insurance for children carries slightly morbid overtones for many. In reality, however, child insurance plans can be both an effective wealth transfer strategy as well as a valuable source of funding for education.