A child insurance plan offers the benefits of a customised structure and waiver of premium, but these policies work best if taken early and continued for the full term.

The rising cost of education is troubling Indian parents. More than 60% of the respondents in an online survey by ET Wealth listed this as their biggest worry. This was followed by lack of knowledge, not saving enough and starting too late. We hadn't included the biggest worry-the risk of their own untimely death-as a choice. We should have. According to the National Crime Records Bureau statistics, an Indian dies in an accident every 90 seconds.

It's a terrifying thought for any parent-leaving his family without adequate means to lead a comfortable life. The only way to get over this worry is to take a sizeable life insurance cover. Financial planners swear by term plans, arguing that these policies are the best way to cover the risk of early death. They certainly are because they offer a high cover at a low cost and give out a lump-sum amount to the nominee if the policyholder dies. But the policy ends right there.

On the other hand, a child insurance plan offers a lump-sum payment on the death of the policyholder, but the policy does not end. All future premiums are waived and the insurance company continues investing this money on behalf of the policyholder. The child gets the money at specified intervals as planned under the policy. "In this way, the parent ensures that his child's needs are taken care of even if he is not around," says Gaurav Rajput, associate director, marketing, Aviva India.

Almost all life insurance firms have child plans in their portfolio of offerings. Some of these are market-linked policies, which allow policyholders to invest in equities and debt, while others are traditional plans, which invest only in debt. In case of a life insurance policy, the premium paid for a child plan is eligible for tax deduction under Section 80C, while any income from the plan is tax-free under Section 10 (10D).

Critics of child plans argue that these policies come at a very high cost compared to a simple term plan. They say that instead of allocating a huge sum as premium to a child plan, a parent can buy a term plan of the same amount for himself and invest the balance money in mutual funds. On maturity, he will have a bigger corpus (see table). However, they miss out on a crucial detail. What if the parent dies five years after taking the plan? The term plan will give a lump-sum for the immediate needs of the family and further investments in the mutual fund will stop. The child plan, however, will not only pay the lump sum, but continue investing on behalf of the policyholder. Insurers believe the waiver of premium feature in a child plan is the key. "It is a big advantage because it doesn't let the death of the policyholder derail the investment plan for his child," says Rajput.

More importantly, the average, small Indian investor is yet to mature into a long-term player. He is easily unnerved by market volatility and lacks the necessary discipline to create wealth over the long term. It's quite likely for a parent to stop putting money in a mutual fund for his child. "If he is given a choice, the investor loses discipline and stops investing," says Swapnil Pawar, head of products and advisory, Karvy Private Wealth. On the other hand, a child plan will make the parent continue investing year after year, thus ensuring that he saves enough for the kid. One can stop paying the premium after five years, but experts say this should be a tactical ploy to avoid a cash crunch, not a strategic move to reduce one's investment.

Insurers say child plans are structured to meet the needs of the child. "A normal Ulip stops if the insured person dies. This is an unsatisfactory result as the funds will be paid too early and may be used to meet other needs, not the ones planned for," says Andrew Cartwright, chief actuary of Kotak Mahindra Old Mutual Life Insurance.

Higher benefit, higher cost

While the waiver of premium is certainly a big advantage, this double benefit doesn't come free. The mortality charges for a child plan are higher than those levied by an ordinary Ulip (see table). The steeper charge is also because child plans are type II Ulips, which give both the insured amount and the fund value to the nominee on the death of a policyholder. Type I Ulips give only the higher of the two sums and, therefore, have a lower mortality charge. In the table, the ordinary Ulip is a Type I policy. Though the waiver of premium benefit is built into the child plan, you can opt for this benefit as an add-on rider in an ordinary Ulip as well. For a 32-year-old taking a 15-year plan with an annual premium of 1.2 lakh, this benefit will cost around 16,000 a year.

Customised payouts

A child plan offers other benefits as well. From the time he enters your life till the time he graduates from college, your child's expenses are not uniform. There are lean years, just as there are times when his needs are bigger. There are also some milestone years, when a lot of money is needed, as at the time of admission to college. This is why insurance companies structure child plans to match the various stages of a child's life. "You need to plan in advance to meet the ever increasing education expenses. From schooling to higher education to professional education, a child plan can help in planning prudently for all these expenses," says Mark Meehan, chief operating officer, Bharti Axa Life Insurance. A child plan will give a payout when he opts for higher education.

Before you buy

The term of the child insurance plan is very important. A policy works best if it is taken early in life, when the child is still a toddler or in primary school. This will give the investment enough time to grow. A plan taken when the child is already in his teens may not give the desired result because you would require the money for higher education barely 4-5 years later.

Also, the plan should give you adequate life insurance cover. This is usually a factor of your age. At 30, for instance, you can get an insurance cover of roughly 80-100 times the annual premium. At 45 years, this might be lower at 40-50 times the annual premium. Opt for the maximum cover that you are eligible for. Though this will mean higher mortality charges and will reduce the amount available for investment, it will ensure that the primary objective of the plan is achieved. Hyderabad-based Farheen Siddiqui is paying 60,000 a year for a child plan that covers her for only 4.8 lakh. That's grossly inadequate and though Siddiqui has a term plan, she needs to take more insurance to safeguard the future of her daughter.

It's also important to rightsize the premium to suit your pocket as well as your expenses. A child plan requires a multi-year commitment, so don't overreach yourself and buy a policy which you won't be able to service year after year. Conversely, don't go for a plan with a very low premium, as it will not give a significant amount on maturity. "Parents need to take a reality check when they take a child plan. A projected maturity amount may seem very big today, but adjusted for inflation over 15-20 years, it may not be of much help," warns Pawar.

Is the child ready?

There's one thing you need to be sure of when you buy a child insurance plan. The policy covers only one parent and the child is supposed to get the maturity amount. If the insured parent dies, the surviving spouse gets the lump-sum insured amount but will not be able to withdraw or control the fund value. That will be paid out to the child on maturity and will go directly into his bank account. Will an 18-year-old have the maturity to use the big sum prudently for his education? This is the reason some financial planners believe that the control must lie with the parent, not the child. "A parent is saving for his child, so he will work in his best interests," says Punebased financial planner Gaurang Gandhi. If you have a child plan, the only way to ensure proper use of the insurance money is to inculcate financial discipline in your child.

Source : ET