Child Plan Its meaning and need

The Indian community is generally known for its cautious saving plans. People plan and save for future life events from the very beginning. Thus saving for the child’s future needs which includes higher education and marriage is also no different. The financial market gives a wide range of plans which help make the child’s future needs secure even with changing and increasing inflation rates.

Child Plan: Its meaning and need:

The Child life insurance policy is designed to provide a secure fund for the child’s future needs. In case of an unfortunate event of death of either of the working parents this plan helps support the child’s financial needs in future.

The traditional way of arranging for the child’s needs were buying bonds in the child’s name which worked as money back policy. But these bonds only provided partial shield and did not prove to be a very prudent hedging instrument against rising inflation. With changing times, investors started purchasing term plans in their names with the child as a nominee which provided cover in case of death of any one of the working parents, thus providing financial security for future needs.

Different Plans are designed as per the growing market trend and individual need. One can choose as per his/her family needs and premium paying capacity. The basic idea of any insurance plan remains the same i.e. providing for future needs by systematic regularly saving in the form of premiums. The insurer in turn invests the money and the period of years pays back a lump sum on maturity of the policy or provides financial security in case of an unfortunate event of death during the term of the policy.

Modes of Premium Payment:

1. Regular Premium Plan: In this case the policyholder is required to make regular premium payments until the child turns 18. Once the child reaches the maturity age the insurer starts paying back the money in installments. In case of the untimely death of the parent before the maturity of the policy, the insurance company waives of the remaining premium and keeps the policy alive. On maturity of the policy the child receives the sum assured.
2. Single Premium Plan: In this case there are no regular premium payments to be done. The policyholder makes a onetime payment at the inception of the policy and receives the sum assured at the maturity of the policy or as death cover to the child in case of untimely death of the policyholder.

Further, Child Plans could be categorized into two types:

a) Endowment Plans: Under this type the insurer invests the premium amount received into the debt funds. Thus the profits on investment would depend on the company performance. Making the profit yielding capacity of the fund depend purely on company profits.

b) ULIP Plans: These are the most popular plans in the Indian market. They are linked to the equity market and thus returns are visible only in the long run making it a suitable option for Child Plan since child plans are aimed for long term investments.

In both the plans in case of untimely death of the parent, all future premiums are paid by the insurance company and the child receives a lump sum as the insurance part and the final payout is done once the policy matures. The final payout has the additional bonus component in case of endowment policy.

Waiver of Premium: Child Plan has a unique feature known as the Waiver of Premium, which is an exclusive feature of this plan only. According to this feature, in case of death of the parent all future premiums are paid by the insurance company and the plan continues till maturity. On maturity either a lump sum is paid out or payouts are on regular intervals depending on the company policy.

Benefits and Drawback of Child Plan:

The Benefit of the child plan is risk cover it provides. This plan gives the parent the assurance that in his/her absence the future needs of their child would be taken care of. In case of an untimely death of the parent, the remaining premiums are paid by the insurance company thus providing assured return at the maturity of the policy. Also the premium amount in these plans can be claimed for exemption under the income tax act, section 80(c).

This plan has its own drawbacks too. The return on the investment is relatively lower compared to any other plans. The reason being the premium amount is divided into two parts, one as life cover and other is invested into different instruments. Now, since the premium allocations charges are higher in the initial years the return on investment is negligible.