Opt for child plans that offer premium waiver options

Given the rising expenses and the high cost of education, saving for children is becoming increasingly important.

Child plans offered by life insurance companies are one way of doing this. Under revised guidelines, insurers are considering launching products to meet various needs in this regard-— child care, education and marriage expenses.  

In the case of a child plan, the parent contributing the premium is the insured life, while the child is the beneficiary.

The inbuilt benefit that waives all future premia, along with a fixed sum assured to the beneficiary in case of the demise of the parent, is the biggest attraction towards these plans.

“Child plans ensure the investment is protected from any sudden demise of the life insured,” says Tarun Chugh, managing director and chief executive, PNB MetLife India.  

However, this feature is available only if it is a unit-linked insurance product (Ulip), not a traditional plan.

It is available for PNB MetLife’s Met Smart Child and for Aegon Religare Life Insurance’s Rising Star, both of which are Ulips.

This isn’t the case for Aegon Religare Educare Advantage, a participating plan.  

Yateesh Srivastava, chief operating officer, Aegon Religare, says, “In other cases, the investment plan ceases with the death of the investor and the proceeds realised have to be reinvested and managed to meet future goals.”  

Typically, child plans are used to save for goals such as higher education or wedding expenses.

They combine a component of savings with insurance. In case of traditional child plans, the payout matches the requirement.

For example, for a typical child plan, payouts start when the child turns 13, and continue till he/she is 21.

The percentage or amount of payout is designed to meet expenses such as school or tuition fees and, later, higher studies.  

A combination of the same benefits can also be achieved by purchasing pure term insurance (to insure the parent) and investing in mutual funds/fixed deposits on a regular basis, says Gaurav Roy, co-founder, Bigdecisions.in.

“Parents who are more financially savvy may opt for this, as they may be able to structure these themselves or with the help of a financial advisor. This gives more flexibility in terms of moving the corpus around in case of bad fund performance or low interest rates,” he says.  

However, Yashish Dahiya, co-founder and chief executive of PolicyBazaar, says unlike a term insurance plan, a child plan is specifically for a child, allowing only him/her to avail of its benefits.

As a result, the chances of misuse of the corpus are reduced.

“While term plans provide a good cover at a reasonable price, these do not take into consideration the specific needs of a child,” he says.  

A child plan has a lock-in for a certain period and the costs of breaking this lock-in may be high, Roy says. By comparison, mutual funds have no lock-in, while Public Provident Fund has a 15-year lock-in period.  

A deterrent could be child plans are considerably more expensive than Ulips or a combination of term plans and mutual funds, says Dahiya.

This is because of higher mortality charges. “Child plans are type-II Ulips, where both the insured amount and the fund value are given to the nominee.

Type-I Ulips (regular Ulips) give only the higher of the two sums and, therefore, have a lower mortality charge. Ensure you opt for a waiver of the premium, if this isn’t already included in your policy,” Dahiya says.