Child Plans | Benefits | Analysis

Introduction

Every parent aspires to give the best of everything to his / her kids. Every parent dreams that his / her kid gets the best education in the world and his / her wedding should not be less than any other ‘big fat Indian wedding’ and it should be one of the most talked about events in town. Parents do everything it takes to accomplish this dream of theirs. So the moment the kid is born parents start investing for the kid’s education and marriage. Parents explore various options to invest for their kid’s education and marriage which may include investments in direct equity shares, mutual funds, child insurance plans, real estate, fixed deposits, National Savings Certificate (NSC), Public Provident Fund (PPF), and Government Bonds etc. etc. Parents make sure no investment avenue is left unexplored when it comes to choosing an investment option for their kid’s future. They make sure their kid gets the best of everything. In this article we will keep our research limited to Child Insurance Plans.

Child Insurance Plans

Child insurance plans help the parent in securing the financial future of their children. The child plans are purchased by the parents to save funds for their children’s education, marriage and other financial needs of their children. Child plans also offers financial security for children’s future in case any unfortunate event occurs like the parents unfortunate untimely death. Some important features of child plans are:

Help in saving funds for future financial need such as education and marriage.
Provides insurance cover for the child or the parent depending on the plan chosen.
The sum assured is paid to the child at the maturity of the policy along with bonus in case of traditional plan or the fund value is paid in case of ULIP.

Life Insured

In some child insurance plans the parent is the life insured. These plans mostly come with a built-in ‘Waiver of Premium’ Rider. This ensures that in the case of unfortunate untimely death of the parent the future premiums are waived off and paid by the insurance company and the plan is continued as normal.

In some plans the child is the life insured. These plans work a little differently than other insurance plans. The coverage on the life of the child starts after the child attains a specified age (mentioned in the plan). For example in case of LIC’s Komal Jeevan the plan can be started when the child is just born. But the life cover on the child’s life starts either two years after the commencement of the policy or after completion of 7 years of age of the child, whichever is later. This time gap between the start of the policy and the start of the life cover on the life of the child is known as the deferment period. The date on which the life cover starts is known as the deferred date. If the child dies before the deferred date the parents are just returned the premium paid so far and not the sum assured because the risk cover has not started. In case the child dies after the deferred date then the sum assured is paid.

When the child turns 18 years old the title of the policy automatically passes on to the child from the parent. This process is known as vesting. The date on which the policy transfer happens is known as the vesting date. In LIC Komal Jeevan there is no waiver of premium rider. The parent (proposer) can pay a little extra premium and add the waiver of premium rider so that the policy is continued by LIC in case of early death of the policy.

There are three kinds of child plans available in the market – Child Endowment Plans, Child Money-Back Plans (both these plans come under traditional child plans category) and Child Unit Linked Insurance Plans (ULIPs). Traditional plans invest major proportion of the premiums in debt instruments like Government Securities (G-Secs), corporate fixed deposits, bank fixed deposits etc. and are low risk investments. ULIPs invest in both equity and debt as per the choice of the policyholder and as a result it has scope to offer comparatively higher returns on the investments.

Now let us see an example of each type of Child Insurance Plan

1) Child Money Back Plan – LIC Komal Jeevan

In this plan the life insured is the child and not the parent. The policy can start as soon as the child is born but life cover begins only after 2 years of commencement of the policy or after the child had attained 7 years of age.

Premiums can be paid either yearly, half yearly, quarterly or monthly. The premiums have to be paid regularly till the child turns 18 years old. The policy provides guaranteed additions of Rs. 75 per thousand sum assured for each completed year. This effectively means 7.5% annual return is guaranteed by LIC. Over and above this LIC may pay Loyalty bonus depending on the performance of the company.

Komal Jeevan is a money-back policy and pays the following benefits as per the age of the child:

Survival Benefit
The percentage of sum assured as mentioned below will be paid on survival to the end of specified durations

On the policy anniversary immediately following the life assured attains the age of	% of Sum Assured
18 years	20%
20 years	20%
22 years	30%
24 years	30%

In case of death of the child during the policy after the commencement of risk, the sum assured along with the accumulated guaranteed bonus and loyalty additions (if any) will be paid.

2) Child Endowment Plan – ING Creating Life Child Protection Plan

This is also a traditional plan, but this is an endowment plans unlike LIC’s Komal Jeevan which is a money-back plan. In this plan the parent is the life insured. This plan comes with a build-in ‘waiver of premium’ rider. On the death of the parent during the policy tenure the sum assured is paid by the insurance company. The future premiums are waived off. The subsequent premiums are paid by the insurance company. On maturity of the policy the child is paid the sum assured along with the accumulated annual bonuses and the final additional bonus (if any).

3) Child Unit Linked Insurance Plan – Max New York Life Smart Steps Plus

In this plan the investment risk is borne by the insured as he chooses where his premium after deductions should be invested. In this plan the life insured is the parent. The insured can choose from 5 available funds for investment of premium. In case of death of the parent the company will pay the entire sum assured. The future premiums will be waived off (built-in waiver of premium rider). The company will continue paying the premiums. The company will also pay a ‘Family Income Benefit’ @5% of the sum assured to the nominee / beneficiary on each policy anniversary in case of death of the life insured. On maturity of the policy the company will pay the fund value.

Analysis

Gift: These policies can also be gifted by close relations such as grandparents, uncles etc. to the child. However the proposer can only be the parent or legal guardian. In LIC Komal Anand, the close relatives have the option to gift single premium policy.
Section 80C Benefit: Policyholder can avail deduction for premium paid for child plan while calculating taxable income. These deductions can be claimed under Section 80C of the Income Tax Act for premium paid upto Rs. 1,00,000 annually.
On death of the parent: In case of unfortunate demise of the parent insured, all the policies pay the sum assured in lump sum. The further premiums are waived and the fund value is paid at maturity.
On death of child: In case of ICICI Pru Smart Kid regular premium and ING Vsya creating life child plans, even if the nominated child dies, the policy continues. Whereas, in LIC Komal Jeevan, the sum assured along with accrued bonus is paid and the policy is closed.
Maturity benefit: In ICICI smart kid, the maturity benefit is payable to the child at the age of 22 years. In case of LIC’s Komal Jeevan, the maturity benefit is payable when the child is of 26 years. The ING Vysya creating life child plan is a money back policy, hence the maturity benefit is payable in the 4^th, 8^th, 12^th and 16^th year. In ULIPs, the, maturity benefit (fund value) is payable at the end of the policy term.
Surrender value: In LIC’s and SBI child plans the policyholders can surrender the policy after the third policy anniversary. Whereas in Max New York Life Smart steps plus plan the policyholder can surrender the policy after the first policy anniversary, provided an amount equal to one annual target premium (ATP) has been paid.
Loan: The SBI life regular unit plus child plan offers loan to the policyholders, after the 3^rd policy year.
Exclusions: If the insured parent commits suicide within one year of the commencement of the risk, policy becomes void and no claim is payable by the insurance company.

Conclusion

There are several child plans available in the market and parents have to be extremely careful in selecting one. The purchase of child plans should be need based. For example, if the need to purchase a child plan is for daughter marriage, then in this case an endowment plan with guaranteed returns will be more appropriate where the insurance company pays a lump sum amount after a certain period, instead of regular payouts. Though most of the features are almost similar in all the child plans, the policyholder should look at ‘waiver of premium’ benefit in the child plan, which ensures that the child continues to get the benefits of policy, even if the parent is not there to provide for him.

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Tags: Comparison of child plan, Insurance, Insurance Company, LIC Komal Jeevan, ULIPS