Ch. 13: Things To Know Before Buying Child Plan

As a parent, one of your main goals is securing your child’s future, which means you will need to ensure that the major milestones of their life are covered and they face no financial problems even if you aren’t around.

Child insurance plans are designed for this very purpose. These plans help you accumulate the funds your child will need for a bright and stable future. Generally, they are purchased by those individuals who want to help their children follow their educational pursuits in whichever field they choose by giving them assured financial support. They can also be purchased by individuals who want to plan their child’s marriage.

While child plans have a number of benefits, it is also necessary to analyse -

• Whether you and your family require a child plan
• If so, the child plan that works the best for you and will give the needed returns
• The amount of money you can invest in the plan

Let’s have an indepth look at the things you should keep in mind while purchasing a child insurance policy -

The goal of your investment

Child plans are usually purchased to create a sufficient corpus for future child-related expenses like education fees and marriage costs, even in your absence. You should clearly know the goal your child wants to achieve. This will give you a sense of whether you need the policy.

Choosing the cover amount that’s right, for you

The cover amount is the money that you’ll receive from the insurance company when the policy matures. Your nominee will receive the cover amount if you pass away while the policy is active.

You should ensure that the cover amount you choose will be sufficient to cover the expenses for the milestones you have chosen, whether you need it for higher education fees, wedding expenses, etc. Always take into account an inflation rate of 10-12% for a period of 12-15 years - so you or your nominee isn’t underfunded when the payout happens.

Benefit payout frequency

You can choose the frequency with which you want to receive the assured payouts, maturity benefit, and death benefit under your policy. You can decide the same based on your child’s milestones.

For instance, you can choose to receive the assured payouts spaced over three years when your child turns 18 to take care of recurring expenses like admissions fees, hostel charges, extracurricular activity fees, etc.

Know your affordability

It is important to stick to the budget you have in mind and choose the premiums or cover amount that you can afford. You can’t risk your present day finances for future needs.

Premium payment term

Verify the premium paying term, i.e., the number of years you will have to pay the premiums regularly and whether it fits into your financial plan.

You can also check if the policy has a limited pay feature. It allows you to speed up your premiums in bigger instalments, while enjoying the cover for a longer duration. Limited Pay is useful if you want to get the payment liability off your chest quickly.

For example - Rahul is a small business owner and has an erratic income. His average yearly income is Rs 20,00,000 but there’s no guarantee that he will receive the same amount each year. Choosing the limited pay option for his child’s insurance plan would be a better choice for him as he can pay off the amount in a fewer number of years.

Premium payment frequency

You can also choose to pay the premiums on a monthly, quarterly, half-yearly, or annual basis - depending on your convenience.

Important Note - Irrespective of the type of payment frequency you choose, make sure you set up auto-debit or standing instructions on your bank account so that your premiums are paid on time and your policy doesn’t lapse.

For example - Manish wants to invest in a child plan to save money for his 12-year-old child’s education expenses and also to take care of any sudden medical emergencies. He has come down to two plans - one with a premium of Rs 10,000 per month and one with a premium of Rs 5,000 per month. Manish earns Rs 40,000 a month, which is why it will be advisable for him to choose the policy with Rs 5,000 as the premium amount.

Know and understand the returns

You should be aware of the exact return on investment you will receive from this investment. Ask the insurer or your financial advisor to share the IRR for the investment you are making. You can even learn how to calculate the same yourself, with the help of online calculators.

The Internal Rate of Return (IRR) is a financial metric that compares the returns from your inflows and outflows. It essentially tells you how profitable your investment will be. The higher the IRR, the better your investment is.

Make sure that the returns are enough for the goal of your investment.

Guaranteed and Non-Guaranteed Benefits

A guaranteed benefit is the cover amount and accrued bonus you’ll definitely receive from the insurer.

On the other hand, as the name suggests, non-guaranteed benefits are variable benefits. They will depend on the future performance of the insurance company, economic conditions, etc.

You should always ask for a benefit illustration from your financial advisor. This will help you understand the guaranteed and non-guaranteed benefits attached with the plan you’re planning on buying and whether they work for you.

Policy Surrender

While you’re investing in a child plan, you might not want to continue paying the premiums. Maybe you wish to shift to another plan or the goal you have in mind doesn’t exist anymore.

Since you’re investing a huge chunk of your hard-earned money in a child plan, you should be aware of the consequences of discontinuing the same. It is important to be informed about the money you’ll receive or lose if you discontinue the policy, say, in 4 or 5 or 6 years and how this will affect your child’s milestones.

Child plans are eligible for both guaranteed and special surrender values. The guaranteed surrender value will be a percentage of the premiums paid minus any benefits paid to the policyholder or the nominee, and the special surrender value is determined by the insurance company. The surrender value payable will be the guaranteed surrender value or the special surrender value - whichever is higher.

Thorough research

As mentioned in the previous point, you will be investing a huge amount of your own money in a child plan, which is why you should conduct an in-depth analysis of the different plans available in the market. Go through the benefits, features, pros, cons, and comparisons of these plans before zeroing in on one.

Insurer’s past performance

Review the past performance of the insurance company you’re going to buy the child plan from.

• Returns and bonuses given to the existing policyholders
• Claim settlement history
• Any information or reviews you can get about their services from other customers

Free-look period

The free look period is a time span during which you can go through the policy document, features, terms and conditions, exclusions, limitations, etc. of the policy you have purchased. If you feel like the policy isn’t right for your needs, you can return the policy to the insurer without any charges (penalty or cancellation) - during this period.

Grace period and Revival period

The grace period and revival period play a role if you happen to miss out paying a premium.

Grace period - An additional time period you get to catch up on your premiums, failing which, your policy will lapse. All benefits under the policy will cease.

Revival Period - If your policy lapses after the grace period, the insurance company will give you a revival period during which you can get your lapsed policy back.

The conditions for both the grace period and revival period vary with different insurers. Check and understand this properly before making the purchase.

Nominee of the policy

When it comes to child plans, the parent is the policyholder and the child is the nominee. All the accrued funds are payable for child-related expenses, both in the presence and absence of the parent.

Riders

Riders are additional benefits on the child plan that you can purchase at a certain additional cost and with no extra paperwork to help increase coverage. They are add-ons that will offer a payout under specific circumstances. Make sure you don’t miss out on these.

Some riders available will child plans -

1. Surgical Care Rider
2. Accidental Death and Disability Rider
3. Accidental Death Benefit Rider
4. Hospital Care Rider

Financial Advisor

Lastly, if you have any questions about the insurance plans or don’t want to drag yourself through the mundane task of reading policy documents or are confused about the plan you should choose - talk to a professional and expert financial advisor. They will help you find the right policy, solve all your doubts, and provide you with end-to-end assistance.

Buying insurance is a huge decision, both when it comes to your present finances and future finances. Since you have to pay the premiums for a number of years, you need to ensure that you have the bandwidth to do so. And since you will need the funds for your child’s future expenses, it is necessary to choose the right cover amount. Along with these decisions, it is also important to take other factors into account like the policy terms and conditions, performance of the insurance company, the free-look period, etc. - to make a well-informed decision that will give you the returns you need.