Child insurance plans, ideal for your child?

By BankBazaar.com | June 28, 2011

When you pay the premium for this plan, part of the premium amount goes towards paying for the life cover. Remaining part of the premium is invested in various instruments either debt or equities. However this portion is quite small, as the insurance companies tend to deduct premium allocation charges upfront. These charges are meant to pay the distributor commissions. As a result, very small part of the premium gets invested during the initial years.

You have welcomed your new bundle of joy in this world with a lot of enthusiasm. You intend to give them the best of everything. In order to help you achieve this objective, you start investing in various instruments on your child’s behalf. To capitalize on the parents’ intentions about giving the best for their children, many insurance companies have introduced children’s plans. These plans have enticed many parents to invest on behalf of their children, under the impression that their child’s future is secure. But is it true? Are they worth investing? Is this the best investment option for your child? Let’s take a look at what these plans are all about.

    • What are children’s plans?: Children’s plans are insurance-cum-investment plans offered by insurance companies are similar to ULIPs. However the difference between a ULIP and a children’s plan is that the parent starts investing in the children’s plan right from the time the child is born and can withdraw the savings once the child reaches adulthood. Of course, some plans do allow intermediate withdrawals, at certain intervals.
    • How much insurance do I get?: These plans do come with inbuilt insurance component in order ensure the sum payable to the child is insured against the premature death of the earning parent. The least life cover you have to select in these plans is: Sum Assured = Term * Annual premium / 2. But in most instances this sum assured is inadequately woeful. Experts recommend that it is necessary  to buy a life cover of minimum of 7-10 times the annual income of the earning parents. This is to ensure that in case if the earning parent meets untimely death, his/her spouse and the child are adequately provided for. So if you are relying only on the life cover provided by these plans, then remember you will always remain under insured.
    • What about the investment?: When you pay the premium for this plan, part of the premium amount goes towards paying for the life cover. Remaining part of the premium is invested in various instruments either debt or equities. However this portion is quite small, as the insurance companies tend to deduct premium allocation charges upfront. These charges are meant to pay the distributor commissions. As a result, very small part of the premium gets invested during the initial years. Also if you opt for any features provided by the insurer like waiver of premium, switching option etc., the charges for the same are deducted from the amount invested. So the returns from these plans tend to be very low in the initial years and if you stop the plan without completing the entire tenure, you might end up suffering loss.
    • Disadvantage of the children’s plans: These plans do rate poorly both in terms of life cover and investment option. You can buy plain term insurance at lower premium that provides you with very high life cover. For investments, equity mutual funds are the best. You can invest the highest possible amount in these funds at very low fees. Also if the fund tends to perform poorly, you can stop your investment and switch over to another fund, without paying any penalty. This is not possible in case of children’s plans as there are heavy surrender charges applicable.
    • Are they right for me?: One needs to evaluate if they are an ideal option. More often no they are not. While they do provide you with tax benefits, you can get the same tax benefits with a combination of term insurance and mutual funds. Also, term insurance + mutual fund combination beats the children’s plans on the fronts of costs and returns. So it is better to give these plans a miss and instead go for term plan and mutual fund.
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4 thoughts on “Child insurance plans, ideal for your child?

  1. AvatarAnonumous

    Hi,I work for "X" insurance company and as far as my knowledge is concern since september 2010 IRDA has give clear instructions to all the insurance companies operational in India that,they can't deduct more then 4% on an average per annum towards the charges.So, now the ULIP plans are more customer friendly.So, according to me every parent should take and plan adequate insurance policy to safe guard the childs future by selecting term assurance and a child plan,where they can have higher life risk cover(term plan) and waiver of premium with child plan.

    Reply
  2. AvatarThirumalai S

    1. The article does not have up to date facts on surrender charges; which is nil from the 6th year onwards. 2. The option of premium waive off in case of an unfortunate eventuality is an USP of child plan which has not been touched upon. 3. Term and Mutual fund is a good investment option for the market sauvy. What about a solution for the majority who are not so 4. The article also does not dwell upon the fund management options available on leading insurance co's where in the fund manager is given the option to switch been equity and bond options based on market basics like the P/E ratio.

    Hope comparative analysis is provided for in the future before jumping to conclusions

    Reply
  3. AvatarSriSree

    Post Sept 2010, ULIP plans have really started making good investing sense after the allocation charges have come down drastically and also commissions payable to the agents have come down significantly. In India any one investing in term insurance is reluctant, primarily because Indians value money and to get back something at a later date, even if its value has diminished is OK with Indians as they have something to spend afterall.
    There are good plans from HDFCLIFE and KOTAK too in this mater.

    Reply
  4. Avataramalaraj marian

    Bang on the target. the writer has done a great joj. I am the one who belives that a maximum amount that can be invested should creat the real value of the investment. and as far as protection is concernted you can always be sure that the term is the right choice. one cant buy the real risk cover that one needs from any other insurance plans than that of a term insurance in a very cost effective manner. And trust me you really need more conviction than any thing to make money in the markets a ulip or a mutual fund are comming with similar risk so dont be fooled.

    Reply

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