Ch. 12: How Does Child Plan Work?

Parenting is not an easy task. Fulfilling your child’s dreams and helping them achieve their aspirations is a crucial element of the job - and education takes up a huge chunk of this. So do other heavy expenses like weddings.

Imagine a situation wherein your child is planning on becoming an architect or an engineer and wants to study at one of the best universities in India or wants to move to another country for both their undergraduate and postgraduate courses. This will obviously not be easy on the pocket, but it’s also important to pay heed to their education and development and not compromise on the same.

How can you ensure that your child gets the best education? How do you take care of the expenses? Is there a way to accumulate enough funds without you or your child facing financial struggles in the future?

A child insurance plan helps you with just that.

A child insurance plan is basically a plan that is bought by the child’s parents to save up funds for important and large expenses like education, marriage, etc. These plans are generally bought by people who want to safeguard their child’s future and want to build a safety net for the same.

A child plan can be divided into two aspects -

• Investment/Savings - It can be used to create a sufficient fund for big life goals, i.e, higher education, marriage etc.
• Insurance - This ensures that the child remains protected even if the parent passes away.

The parent, who purchases the policy and pays the premiums, is the policyholder and the child is the beneficiary. Once the plan is purchased, the policyholder pays the premiums for a specific period of time known as the ‘policy term’.

The policy term commences when the premium is paid. It is mandatory to pay the premiums regularly to keep the policy active.

1. Deciding the cover amount

A child plan is purchased to take care of the financial costs of important milestones in your child’s life. Hence, you need to figure out a cover amount that will be sufficient to comfortably manage all these expenses.

Here are a few steps you should follow -

• Sketch out a plan of the milestones you wish to cover, whether it’s admission fees, wedding planning costs, etc.
• Make a list of your finances. This includes your assets like life covers, gold, cash, etc. and liabilities like loans, etc. This will help you get a sense of how much you can spend from your own pocket.
• Thoroughly research the costs for the milestones you plan on covering and factor in 10-12% inflation for at least 12-15 years, since these will occur at later stages. Factoring in inflation will create a safety net for you, so you don’t have to worry about any expenses.

You can estimate the funds you will need for your child’s education or marriage using our Child Future Planning Calculator.

2. Participating vs Non-Participating Child Plan

The next step is deciding whether you want to purchase a participating or a non-participating child plan.

A Participating plan will offer you a variable bonus along with the benefits paid, whether it’s a maturity benefit or as a death benefit. The bonus accrues from the profits the company makes from participating policies.

A Non-Participating plan will offer you fixed benefits. This means that the payout maturity benefit/death benefit is guaranteed.

Both types have their own advantages and disadvantages. A Participating policy might be the right choice if you wish to earn the extra bonus. Whereas, a Non-Participating policy will be better if you want guaranteed risk-free returns.

3. Plan customizations

A child plan can be customised according to your financial situation and preferences.

This can include -

A. Premium Payment Frequency
You have the option to pay premiums according to your convenience, i.e., on a monthly, quarterly, half-yearly, or annual basis. The premium can even be paid in one go.

For example -
Ashok is the owner of a dry fruits business in Mumbai and Gopal is one of his employees. Ashok has an average monthly income of Rs 2,00,000 but it is very erratic, there are some months without an income as well. On the other hand, since Gopal is an employee, he has a fixed salary of Rs 25,000 per month.
Both Ashok and Gopal have 10-year-old daughters. They want to invest in a child insurance plan to save money for their higher education and to take care of their finances even in their absence.
Ashok opts to pay for the policy in one go, since he is self-employed and his finances are unstable. Gopal opts to pay for the policy monthly as it fits into his monthly budget.

B. Limited Pay Option
You can decide to pay off the premiums in a shorter period. This will help you bear the premium payment while you have enough funds.

For example - 45-year-old Rekha purchases a child plan with a cover amount of Rs 25 lakhs. The policy shall end in 20 years. She will retire when she is 55, and hence, decides to pay off the premiums in the next 10 years. She opts for a limited pay option of 10 years. The premium of her policy is Rs. 30,000 per year. Since her premium payment term is 10 years, she will be able to pay off all the premiums of her policy by the time she retires.

C. Mode of payout
The mode of payout can be decided based on the child’s needs. This may be -

Assured Payouts, i.e., a predefined percentage of the sum assured which is paid throughout the benefit payout period, on an annual or biannual basis. The benefit payment period and frequency depends on the product you choose. Some plans give you the option to receive the payouts only when a few years have passed after the premium payment term is over. Some plans may not have this condition.

A lump sum along with any accrued bonuses. Bonuses will be paid only if you’ve a participating child plan. This is payable when the policy matures or as a death benefit.

As a combination of both. This is a good choice if you want to cover both educational goals and marriage costs.

Important Note: Customization of payout options varies across insurers and products. Make sure you go through the policy wordings carefully.

D. Riders
Riders are add-on covers that can be bought with your plan for covering other important financial risks.

Some riders available with child plans are -

a. Accidental death rider
b. Hospital Care rider
c. Accidental Disability rider
d. Critical Illness rider
e. Surgical Care rider
f. Waiver of Premium due to Disability rider
g. Waiver of Premium due to Critical Illness Rider

You can read about riders in detail here.

Please note this list may vary from product to product and insurer to insurer. Read policy documents carefully to stay informed.

4. Paying premiums

The premiums for the plan you choose are calculated based on the following factors -

• Your Age
• Your Child’s Age
• The cover amount
• The premium payment duration
• Riders you’ve picked
• Whether the policy is participating or non-participating

Once you have given your basic information and selected the policy as well the customization options, and paid the premium, and submitted the relevant documents - the underwriting process begins. If your application is approved, the policy is issued to you.

5. Paying renewals every year

Remember to pay the premiums regularly, before the due date, to keep the policy active. Non-payment may lead to the policy lapsing.

Pro Tip: Always put your standing instruction on a bank account, and not on a credit/ debit card - as the cards come with an expiry date, during which your payment might not go through smoothly.

6. How does a child plan pay back?

A. Assured Payouts
The sum assured can be payable as instalments over a number of years. These instalments are a predefined percentage of the sum assured that can be paid during the policy term. At the end of the policy term, you will be eligible to receive the cover, the cover with the accumulated bonuses, or only the bonuses - depending on the product.

Please note that the frequency and type of payouts may differ with each product and insurer.

B. Maturity Benefit
The maturity benefit is basically the sum assured with any accrued bonuses. Keep in mind that bonuses will accrue only if it is a participating policy. Only accrued bonuses may also be paid, depending on the product you have chosen.

C. Death Benefit
Child plans are an extremely practical way of securing the child’s future in the absence of the parent, that is, if they pass away. A child plan does not terminate even if the parent, the owner of the plan, dies.

What happens is that the insurer waives off all future premiums and the funds continue to grow until the policy matures, and the insurer continues to invest on the policyholder’s behalf. At the maturity of the policy, the child is entitled to receive the maturity amount as a lump sum payout promised or the accrued bonuses, depending on the product.

If, in any case, the child is a minor - an appointee handles the funds until they turn 18. An appointee is a person nominated by the policyholder during policy purchase who is responsible for handling the death benefit payouts - till the child is a minor.

For example - Rajesh purchased a child insurance plan with a coover amount of Rs 30 lakhs in 2012 to take care of his child’s higher education expenses. The policy will mature in 2023 and Rajesh had to pay a premium of Rs 8,000 per month until 2019 to keep the policy active. He unfortunately passed away due to an illness in 2014. In this case, instead of the policy expiring, the insurer waived off all the remaining premiums and continues to invest in the policy on behalf of Rajesh. His kid is entitled to receive the sum assured as periodic payouts and this money will help him pay for his higher education without having to give up on his aspirations.

7. How can you discontinue the policy?

While you invest and continue paying premiums for a child policy, you may want to discontinue the policy. This is known as Surrender of the policy. In such a situation, you will receive a surrender value. Surrender value is available only after you’ve paid premiums for at least two policy years.

Komal has a 7-year-old son, Mohit. She wishes to save up funds for his higher education expenses, including undergraduate and postgraduate studies. She chooses a participating child plan in 2022 with a cover amount Rs 20 lakhs and a policy term of 10 years. She decides to go ahead with the lump sum payout option at the end of the 10 year period, and will be required to pay a premium of Rs 30,000 per year till then to keep the policy active.

Let’s see how the benefits will pan out -

1) Maturity Benefit
The cover amount Rs 20 lakhs along with any accrued bonuses will be payable to Komal after the policy term is over, i.e., in 2032. Mohit will be 17 years old - ready to enrol for his undergraduate programme. Komal can use a portion of the cover amount to pay the fees for his undergraduate programme.

2) Death Benefit
If Komal passes away in the 8th policy year, the policy will still remain active. The insurer will waive off the premiums for the remaining 2 years. Once the policy matures, Mohit will be eligible to receive the cover amount of Rs 20 lakhs along with any accrued benefits. However, since he will be a minor, his nominated appointee will take care of the funds till Mohit turns 18. He can use a portion of the cover amount to pay the fees for his undergraduate programme.

A child plan is tremendously beneficial to make sure your child has enough funds to avoid any hindrances in their dreams, goals, and wishes. Ensure that you understand how it works and go through the policy documents before investing, to guarantee the best returns for your unique requirements.

So, you have now understood the ins-and-outs of child plans. There are a few things you should know about and keep in mind before you invest in one - these shall be listed in the following article.