Should you buy a child plan?

Raising a child is no child’s play. Last year, IITs increased their undergraduate education fees from Rs 90,000/- p.a. to Rs 2,00,000/- p.a. Similarly, IIM-Ahmedabad increased the fee of its flagship two-year diploma programme from Rs 18.5 lakh to Rs 19.5 lakh. This is 400% more than what the B-school charged in 2007. If the fees of the management course continues to rise by 20% every year, it would touch Rs 95 lakh by 2025.*

Every parent wishes the best for their child. They visualize a doctor, an engineer or a MBA from a premier institute when they think of their child’s future. However, parents need to realize that this is going be a very expensive affair. Hence planning for this needs to start at the earliest, right from the child’s infancy. Life insurance companies have realized this need and we come across many advertisements for child plans.

What is a child plan?

A child plan is a life insurance cum investment plan which helps a parent to specifically plan and earmark funds for his child’s future be it higher education, setting up own business or marriage expenses.

How does a child plan work?

A child plan comes in 2 variants i.e a traditional life insurance plan or a ULIP. In case of ULIPs they are mostly type II ULIPs (plans which pay sum assured plus fund value).

Some of the salient features of a child plan are as under:

1)      Facility to avail periodic payments at pre-defined intervals to meet the various milestones in the child’s life such as higher education fees, hostel fees, coaching class fees etc.

2)      In-built waiver of premium option whereby on the death of the life insured parent, all future premiums are waived off and the policy continues as per the original terms and conditions i.e. all benefits as mentioned in the policy contract are paid as and when they fall due. This ensures that even in the absence of the bread winner parent the child’s future is not compromised with in any manner due to shortage of funds.

3)      Payment of a lumpsum amount or the sum assured in case of death of the life insured parent during the policy tenure.

4)      The premium paid for a child plan is eligible for tax deduction under Section 80C, while any income from the plan is tax-free under Section 10 (10D). 

Most of the life insurance companies in India have child plans in their product offerings. Many financial experts argue that child plans are mere marketing gimmicks on the part of life insurance companies to sell their products using the parents’ love towards their children as a crutch. They believe that insurance and investment should be separate under all circumstances and one is better off with a term plan for life insurance and invest in mutual funds and other avenues for the child’s future as they are bound to generate more returns which will be able to take care of inflation and the rising costs of education.

For eg:  Rahul is 30 years old with a 2-year-old child. He takes out quotes from a popular aggregator website for a child plan and a term plan of a top private life insurer.

The details are as under:

Plan details	Child Plan ULIP	Term Plan
Sum Assured	Rs 42 lakhs	Rs 42 lakhs
Annual Premium	Rs 4,20,000/- (35,000/- monthly)	Rs 5000/-
Payment term	15 years	15 years
Policy term	15 years	15 years
Death benefit	Rs 42 lakhs	Rs 42 lakhs
Maturity benefit	Rs 1.02 crores#	-

#assumed at 8% non-guaranteed

For the child plan, in case of death of the life insured parent the sum assured of Rs 42 lakhs will be immediately paid. The future premiums are waived off and the policy continues, and the nominee is expected to get fund value of around 1.02 crores on maturity of the policy.

The annual premium of a term plan with sum assured Rs 42 lakhs works out to Rs 5000/- with policy term and payment period being 15 years.

In this example, most financial experts will advise Rahul to go with the term plan and invest the balance 30,000/- in saved premiums (35,000 – 5000) in mutual fund SIPs as this will help generate higher returns in the long run than the child plan. Though this logic appears to be correct, it does not address two major concerns.

The first being that many people may be first time mutual fund investors or those not comfortable with market ups and downs. Some people may get unnerved when the markets turn volatile and may redeem their investments or stop making further investments thereby denting the chances of creating a corpus for their child’s future.

Secondly, the advice of purchasing term plan and investing in mutual funds assumes that the parent will survive long enough to make continuous investments that in turn can generate an attractive corpus for the child. However, in case of premature death of the life insured parent, the term plan will pay the sum assured and cease. This amount may be used by the family for their various needs and not kept exclusively for the child’s future. Also after the parent’s death the investments into mutual funds may also stop and the invested kitty may be used for various needs thereby leaving little or no funds for the child’s higher education.

This is where a child plan scores as it pays a lumpsum on death and keeps the policy active by waiving of future premiums. The lumpsum money received on death can be used by the family for their needs and the maturity amount can be used to build a bright future for the child without any financial burden on the surviving parent.

Of course, the premiums of child plans are quite exorbitant when compared to a term plan. It is up to the parent to carefully consider what kind of investment they are comfortable in and suits their specific situation before taking a call on whether to buy a child plan. Hopefully, the information provided above can help take a judicious decision. Do plan for your child’s future now, someone has rightly said, ‘A good plan today is better than a perfect plan tomorrow’.

*https://timesofindia.indiatimes.com/business/india-business/Save-for-your-childs-education/articleshow/52180613.cms