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Monday, August 11, 2014

Invest in Child Insurance Plans that offer waiver of premium

 

Invest in Child Insurance Plans that offer waiver of premium

 

Given the rising expenses and the high cost of education, saving for children is becoming increasingly important. Child plans offered by life insurance companies are one way of doing this. Under revised guidelines, insurers are considering launching products to meet various needs in this regard—child care, education and marriage expenses.

In the case of a child plan, the parent contributing the premium is the insured life, while the child is the beneficiary. The inbuilt benefit that waives all future premia, along with a fixed sum assured to the beneficiary in case of the demise of the parent, is the biggest attraction towards these plans.  Child plans ensure the investment is protected from any sudden demise of the life insured.

However, this feature is available only if it is a unit linked insurance product ( Ulip), not a traditional plan. It is available for PNB MetLife's Met Smart Child and for Aegon Religare Life Insurance's Rising Star, both of which are Ulips.

In other cases, the investment plan ceases with the death of the investor and the proceeds realised have to be reinvested and managed to meet future goals. Typically, child plans are used to save for goals such as higher education or wedding expenses. They combine a component of savings with insurance. In case of traditional child plans, the pay out matches the requirement. For example, for atypical child plan, pay outs start when the child turns 13, and continue till he/ she is 21. The percentage or amount of pay out is designed to meet expenses such as school or tuition fees and, later, higher studies.

A combination of the same benefits can also be achieved by purchasing pure term insurance ( to insure the parent) and investing in mutual funds/ fixed deposits on a regular basis, Parents who are more financially savvy may opt for this, as they may be able to structure these themselves or with the help of a financial advisor. This gives more flexibility in terms of moving the corpus around in case of bad fund performance or low interest rates," he says.

However, unlike a term insurance plan, a child plan is specifically for a child, allowing only him/ her to avail of its benefits. As a result, the chances of misuse of the corpus are reduced. While term plans provide a good cover at a reasonable price, these do not take into consideration the specific needs of a child.

A child plan has a lock- in for a certain period and the costs of breaking this lock- in may be high, Roy says. By comparison, mutual funds have no lock- in, while Public Provident

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