How Children’s insurance plans work.

All of us are highly focused and planned when it comes to our children. It is on this sentiment that all Children’s insurance plan work in India. What is a child’s insurance plan and is it worth the hype associated with it?

Children’s insurance plans in India are regular life insurance policies that are designed in such a way that they meet the financial needs of your children as and when a need arises. And these requirements can occur in the form of education, marriage and so on. Children’s plans are insurance-cum-investment plans and are similar to ULIPs (Unit Linked Insurance Plans). Under a children’s plan the parents starts investing in the children’s plan right from the time the child is born and can withdraw the savings once the child reaches a particular age. Some plans allow for intermediate withdrawals also.

The most important aspect of these plans is that in the unfortunate death of the premium paying parent, the premium payment will cease but the sum insured would still be payable to the children. This feature is called Waiver of Premium. Earlier most of the children’s plans were money back policies but 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. And at the maturity of the policy, the benefit is paid by the insurance company to the child who is now an adult.

In India there are 2 major types of policies - Traditional and Unit Linked Insurance.  Endowment plans depends largely on the performance of debt instruments like bonds, government securities and the insurer declares periodic bonuses. The maturity value or claim amount would be the sum assured plus accumulated bonuses. ULIPs on other hand take advantage of equity investment and the returns would be higher than in the case of endowment based plans. But ULIPs requires your periodic interventions to sense the financial market and accordingly shift between debt, balanced and equity.  In case you can’t, then it is safe to remain at balanced fund which has equal exposure to both equity and debt market.

It is recommended that the life cover part of the plan should be around 6-10 times of the annual income of the premium paying parent and maturity value should be planned in such a way that inflation should be taken into consideration. If your investment horizon is less than 8-10 yrs, then you should go for endowment plan and if the term is longer than that then ULIP would be a better option. 

It is also advised not to depend on one financial instrument to achieve particular financial objective like children’s future. Even though children plan is marketed to cater specific financial objective still it makes lot of sense to spread it across debt as well as equity instruments available under insurance as well as to other investments to achieve the said financial objective. Two golden rules - not keeping all your egg in one basket and starting as early as possible apply.