Child insurance: Waiver of premium can help secure education goal

Vineet Kumar (name changed on request), a 32-year-old Faridabad-based advertising executive, is the father of a one-year-old. While he finds fatherhood fulfilling, he admits to certain anxieties. “I do sometimes worry about what would happen to my child if I am not around,” says Kumar. A child insurance plan can offer the necessary reassurance to parents like him.

 

Key features

 

These plans generally mature when the child reaches 18 to 25 years. Thus, their payouts are aligned to milestones like higher education and marriage.

 

These products can help with disciplined, goal-based wealth creation. Most importantly, they provide insurance coverage. “On the unfortunate demise of the parent, an immediate lump-sum payout is made. Also, all future premium payments are waived. If the product comes with a premium payment term of, say, 10 years, and the parent passes away after two years, the life insurance company pays the remaining eight premiums, thereby ensuring the policy continues to be in force and offers all the promised benefits upon maturity,” says Srinivas Balasubr­amanian, chief of products, ICICI Prudential Life Insurance.

 

 

Child insurance plans ensure a secure future even if the breadwinner passes away early. “They take care of the problem: How can I ensure my child’s education and other goals are not compromised, even if I am not around?” says Madhu Burugupalli, senior exe­cutive vice president and head of products, Bajaj Allianz Life.

 

These plans may be unit-linked or traditional, guaranteed-return plans. “Some also offer income to the family during the policy term, usually 1 per cent of the sum assured or equivalent to one annual premium,” says Sameep Singh, product head-investment, Policybazaar.

 

SIPs + term plan may not suffice

 

Systematic investment plans (SIPs) usually stop when the breadwinner passes away. Term plans may not be able to provide for longer-term needs. “After the breadwinner’s demise, shorter-term needs take precedence — household expenses, repayment of home loan, school fees, etc.,” says Burugupalli. By the time the child is ready for college, the funds may be exhausted.

 

According to Singh, most families lack adequate term cover, with the sum assured rarely exceeding Rs 1-2 crore. “Such a cover may not suffice to fund the child’s higher education and provide for the wife’s retirement,” he says.

 

Deepesh Raghaw, a Securities and Exchange Board of India (Sebi) registered investment advisor (RIA), notes that if the family members are not financially savvy, term plan payouts tend to get squandered.

 

Child plans make payouts at the right time. “They can ensure that the child’s education goal is met, even if the breadwinner passes away,” says Balasubramanian.

 

Not cost-effective

 

Many of these children plans may not be as cost-effective as a term plan plus mutual fund combo. “Returns, especially in traditional plans, tend to be suboptimal,” says Raghaw.

 

Plans insuring the child’s life, not the parent’s, should be avoided. These policies are also less suitable for older individuals or those with pre-existing conditions. “If you are over 50, the mortality charge will be high due to age. And if you have health issues, the insurer will apply a loading on this charge,” says Raghaw.

 

Tax-exempt returns are limited to Rs 2.5 lakh for unit-linked insurance plans (Ulips) and Rs 5 lakh for traditional plans.

 

Should you opt for a non-participating traditional plan or a Ulip? The former guarantee the payout amount. “But with a Ulip, especially with a longer horizon, a bigger corpus can be accumulated due to the equity exposure,” says Singh.

 

Checks to be run before purchase

 

> In a guaranteed-return traditional plan, get an advisor to check the internal rate of return and make sure it offers at least 6 per cent

> If you are buying a Ulip, check the cost structure and avoid expensive plans

> Ulips are of two types – Type-I and Type-II

> In a Type-I plan, you get the higher of the fund value or the sum assured; in a Type-II plan, you get the fund value plus the sum assured

> To ensure your child gets a higher amount, buy a Type-II plan