Ch. 4: Types Of Child Plan

Imagine you want to buy an electronic gadget, say for example, an oven. There will be many types, with differing capacities, dimensions, and functions. And, you will need to choose the right fit based on factors like the food you will cook, the electricity consumption you can manage, the space of your kitchen, your budget, etc.

Similarly, in the process of buying a child plan, you'll be presented with a wide range of options. Every child plan has its own purpose and is tailored to address individual needs. Some have different payment terms for premiums, some hold different investment options, etc.

Single premium child insurance plan

By choosing this option, you can pay the entire premium in one lump sum without having to worry about the payment due dates or the policy lapsing. The single premium plan will eliminate the hassle of paying regular premiums, and you can enjoy the cover till the policy term ends.

The advantage of this policy is that, once you make your premium payment in one go, a cash value is instantaneously generated and can be borrowed against. It can serve as a secondary source of income for various financial needs without affecting your death benefit.

One disadvantage of this plan is that you might have to pay hefty fees if you decide to surrender it during the first few years of purchase.

Each individual's financial status differs; many people may not be able to pay the entire annual premium at once. As a result, you have the option to pay the premium monthly, quarterly, or half-yearly according to your income and convenience.

When you choose this type of plan, the premium amount is determined by taking into account the policy tenure you select, and will remain the same throughout the policy period.

If you happen to pass away while the policy is active, the policy will pay the sum assured to your nominee, and if you outlive the policy term, the policy will pay the sum assured to you as a maturity benefit.

Under this plan, you are required to pay premiums only for a specified period of time. And, you are financially covered till the end of the policy term. Depending on your convenience, the premium can be paid monthly, quarterly, half-yearly, or yearly.

You can choose to pay your premiums in faster, larger instalments rather than continuing to pay them until the premium payment term is over.

This type of plan is particularly suitable for those who feel they may not be financially sound in the latter part of their lives, for example, after you retire.

For instance, 45-year-old Kushal has purchased a child plan with Rs 20 lakhs coverage with a policy term of 20 years, He is required to pay a premium of Rs 30,000 on an annual basis for the next 15 years. Since he will be retiring when he is 55, he decides to finish off paying the premiums within 10 years to avoid financial strain in later years. The premiums will be adjusted accordingly.

With the help of a Child ULIP, you can invest in a diverse portfolio including equity markets and maximise your capital growth to create a bright future for your child.

Child ULIP provides both insurance and investment benefits. A portion of your premiums goes towards insurance. The other portion is invested in various market instruments. This plan is ideal if you are willing to take on a high level of risk and can bear short-term market fluctuations.

A traditional child endowment plan works like a traditional life insurance plan and provides security and savings in the form of a life insurance cover and guaranteed returns.

Traditional Endowment plans can be of two types - Participating and Non-Participating Child Endowment Plans. Non-Participating Endowment Plans offer guaranteed benefits i.e., the payout at the end of the policy duration or in the event of the insured's death is fixed. A non-participating plan does not include variable benefits - such as dividends or bonuses - because you do not participate in the insurer's profits.

Participating Insurance offers variable bonuses along with the guaranteed benefits. Where do these bonuses come from?

Depending on the insurance company's decisions, your premiums are placed in different types of debt investments like government securities, corporate bonds, etc. The profits earned from these investments are given to you as bonuses. The bonuses vary due to the variable nature of the investment instruments which usually begin to accrue after the 2nd year. You should check whether the bonus distributed is in either of the following forms -

• Cash
• A reversionary bonus (a bonus given at maturity or after the insured's death) that shall be compounded or calculated via simple interest.

A child money back plan is a type of traditional life insurance plan, which provides a guaranteed percentage of the sum assured every few years. Like the Child Endowment plan, this plan also provides security and savings by way of a life insurance cover and guaranteed regular cash backs. They also offer bonuses along with the sum assured.

The risk associated with money-back plans is relatively low. This, unfortunately, comes with a disadvantage that the returns you will receive might not match the rate of inflation. The plan will give you approx. 4-8% returns, whereas the inflation will range across 10-12% - leaving you severely underfunded.

Opting for a child insurance plan is one of the best ways to protect your child's tomorrow, and it can also be valuable for you. At the end of the day, it is all about your child and their happiness, so reserving sufficient financial fund for them is crucial. Pick the right type of child insurance policy for your needs and that of your child to maximise your policy's benefits and ensure a financially stable future for them even when you are no longer around.