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Home > Business > Business Headline > Personal Finance

Securing your child's future

May 19, 2004 12:13 IST

Children's policies are a combination of savings and protection where the parent is insured and the child is the immediate beneficiary.

Child policies are becoming increasingly popular, especially when viewed within the context of the rising cost of education.

Moreover the breakdown of the joint family system means that children have no financial security in case of the death of their parents. The policy not only provides regular savings for the child's future needs, but also financially secures him in the eventuality of the death of his parent (policyholder).

But some financial planners oppose child plans. If you are wondering why, here are the reasons:

  1. They argue that in the first place, your child doesn't have any financial value to be insured. Insurance is meant to mitigate financial losses on death of the policyholder. Since the child is not earning and doesn't have any dependents, there is no need for insurance cover.

  2. If you are investing the money elsewhere, say in a mutual fund scheme, you will get better returns. In short, child plans are not worth the premium they command.

More often than not, these plans prove attractive more as investment alternatives than as plain risk covers. Some of them balance risk compensation well with investment objectives.

In general, all policies set apart some of the premium for providing financial cover to the child from the loss of monetary sustenance. However, most also concentrate on generating competitive returns that cater to the education or marital needs of children on maturity.

The proportion in which plans apportion resources between the two differentiates them in terms of investment instruments or risk covers.

What one should look at before taking child insurance?

When we discuss children policies, we are typically talking about insuring the lives of children and the primary reason for doing that is to give them a policy at a young age, when they are healthy, when they are young and the premiums are very low.

For, the older you (the parent) get, the higher the premium per thousand sum assured. Similarly, the older your child gets, the fewer years he gets to hold the policy, therefore making it dearer for you to secure the same proportion of the sum assured.

Therefore, if something happens to their health even in the future, they are locked into a particular policy.

There are certain companies, which bring an insurance policy that starts the risk cover at one month. While saving for children, the sooner you start on a regular disciplined basis, the sooner you are in position to accumulate enough money for those expensive education needs.

To illustrate, we make a comparison between Mr X and Mr Y. Mr X takes a child plan from, say, HDFC Standard Life Insurance when he is 30 years of age and Mr Y takes it when he is 35.

They both buy the policy on May 12, 2004, for a term of 15 years and the mode of payment they both choose is annual.

The early bird gets the worm. . .
---Guaranteed benefitsNon-Guaranteed BenefitTotal Maturity Benefit
----Assumed Investment ReturnAssumed Investment Return
Age (Yrs)PremiumDate of MaturitySum Assured 6% p.a.10% p.a.6% p.a. 10% p.a.
306,777May 12, 2019100,00038,04084,510138,040184,510
3510,457May 12, 2019100,00022,77047,680122,770147,680

Invest for an objective

Face reality. Know how much you need to pay for college or to achieve any other goal. You should know why you are buying this particular plan.

Is it for higher education or marriage of your child? Choose a plan that suits your aim. For example, if you want to fund your child's engineering degree then the money should come when he or she is around 18 years of age. The maturity period of your plan should be near this age.

Determine the beneficiary

An important decision to make while choosing a child policy is who should be the beneficiary: the child or the parent? The payouts and benefits depend on this criterion.

Policies taken on the parent protect the child against the death of the parent and ensure that a lump sum is available to the beneficiary (child) to meet his/her future needs.

A number of plans also go a step forward and pay a lump sum on maturity regardless of the death benefit. Policies taken on the child are child policies and the risk on these policies commences only after the child becomes 7 years old.

If the child passes away before attaining seven years of age, all premiums are repaid with or without interest as the case may be. If death occurs after seven, the full sum assured plus bonuses are paid to the beneficiary.

Premium waiver

These days most insurers offer you a premium waiver rider. That takes off all the future payments after the death of the parent. Also, look for useful riders like disability rider.

Remember, it is imperative that the policy continues even after your death to fulfill your objectives.

For funding education choose money back plan

If your aim is to fund your child's education, go for money-back plans. These plans make lump sum payouts at certain intervals to meet the expenses that crop up at regular intervals, say, higher studies.

They can be structured to mature when your child attains a specific age such as 18, 21 or 24 years so that money is available to meet crucial commitments.

You should ensure that these periodic intervals match the fee due periods. If you are looking for annual mode of payment, pick a plan that gives money annually, not after say, a gap of every five years.

Usually, the proceeds get triggered in these plans from the child's 18th birthday and the payouts can go up to 30 years.

For long-term aim, go for endowment

In India we still have the endowment polices where you are saving on a regular basis, usually monthly, quarterly or annually, and these policies mature between 18, 21 and 27 years.

So most companies in the market offer these endowment plans specifically for the child's education and future savings. An endowment plan works best if you have a specific objective in mind, i.e. funding your child's engineering degree.

The plan will work because it will mature at the right time. Also, it will give you a lump sum amount. If the policyholder dies during the policy term, a sum equal to the sum assured is paid immediately. In some cases, benefits along with the bonuses are paid on maturity, over and above the payout on death.

In most cases, choosing between insurance plans is like choosing between apples and oranges. No two plans are alike and a strict comparison between premium rates across plans is inconsistent, as each plan bundles benefits often offered as 'extras' in other plans.

So before buy a child plan you should assess your requirements and select a product that is in sync with your needs.

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