A strong foundation of good education, moral values, discipline and health prepares a child to succeed in life and that primary responsibility lies on you as parents. But good education comes at a premium today in this country. As the cost of education is rising exponentially, child investment plans are a smart way to build a substantial corpus for your child’s higher education, overseas studies or marriage.
However, child plan life insurance products abound in the market and some are even mis-sold by unauthorised agents as one when they are not. Therefore, it’s important to have a better understanding of child investment plans. Most insurance companies will tell you that their insurance product is the best investment plan for your child; don’t go by their word or hype but run them through a few checks before you buy.
Keep the following six points in mind as you hunt for the best investment plan for your child.
Your Investment Goals
Ask yourself whether the child plan aligns with the future that you have planned for your child. Your child investment plan must have the right coverage and tenure to fulfil your financial needs at important milestones in your child’s life. Starting early is important. The sum assured should factor inflation in mind. For example – Rs.10 lakh will not have the same purchasing power after 10-15 years.
Check for Premium Waiver Benefit
Premium waiver benefit is an important term to look for in any child education plan. In a child insurance plan with premium waiver benefit all the premiums get waived off in case of the death of the parent or the policyholder. This ensures that the policy continues to be active until the policy term and both death benefit and maturity benefit is available to the child.
Mortality Charges
The premium waiver benefit in a child plan comes with some costs. It’s called mortality charges and it’s slightly higher in a child insurance plan than a ULIP. A child plan is a type II ULIP therefore the charges are higher compared to a traditional type I ULIP.
One way to save on these mortality charges is to buy a traditional ULIP and buy premium waiver benefits as an add-on. If you are a 32-year-old parent investing in a 15-year child plan, you can save up to Rs.16,000 on your annual premium of Rs.1,20,000. [1]
Equity vs. Debt Linked Child Plans
You can go for an equity linked plan such as ULIP if you expect higher returns and have an appetite for risk. If you stay invested in an equity linked child plan for at least 10 years, you may get good returns riding across the wave of market volatility. However, if you are risk averse, go for a debt linked plan such as an endowment plan. Do some research on how the child insurance plan works and whether it’s invested in equity or debt instruments?
A balanced mix of equity and debt fund that comes with risk cover helps you derive benefits from both investment strategies.
Bonus* Eligibility
Check for bonus eligibility of your child plan as it makes a significant impact on the corpus. Also check the type of bonus available. Technically there are four types of bonuses available.
- 1. Reversionary bonus: Bonus keeps on accumulating until the policy’s maturity
- 2. Compound reversionary bonus: The second year’s bonus is added to the previous year’s bonus.
- 3. Interim bonus: This type of bonus is designed to account for bonus if a policy matures or death occurs before the end of the financial year when bonuses are declared.
- 4. Terminal bonus: Terminal bonuses are added only on the maturity of the policy or on death.
Customised Pay-outs
Some child insurance plans offer customised pay-outs to meet important milestones in your child’s life. For example, the Future Generali Assured Education Plan is a child education plan that allows you to systematically save for your child’s education up to 17 years. It’s a type of Guaranteed Income Plan that offers you three options to receive guaranteed pay-outs based on your child's education milestones. [2]
To make your child education plan investment more effective and inclusive, you can opt for riders that cover for accidental death, permanent disability and other unforeseen eventualities in life. Note that every insurance policy has a free look cancellation period and if you are not satisfied or have mis-sold a product, you can cancel the policy within 15 days.
Glossary:
*Bonus rate may vary from time to time based on Company’s Investment Performance.
Reference Links:
1.https://economictimes.indiatimes.com/wealth/insure/why-you-must-have-a-child-insurance-plan/articleshow/30943498.cms
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