What is a child plan? How it works?

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A child plan is a tailor-made investment cum insurance option to meet the financial needs of a child. In a child plan, there are two components– insurance and investment.

The insurance component is designed to protect the child from unfortunate events such as the demise of the parent wherein the child gets a fixed annual payment in case such an event occurs.

The investment component is designed to meet the financial needs of the child through accumulation of money by investing in various instruments.

Types of Child Plans

There are two types of child investment plans

  1. Child ULIPs– The amount paid towards premium is invested partially in debt instruments and mostly in equity instruments. The choice of securities in which to invest is with the policyholder.
  2. Child Endowment Plans– The amount paid towards premium is invested in debt instruments. The choice of which debt instrument to invest in is with the company. 

How it works?

First, you need to decide the cover amount that you want. Second, you make an application with the bank who will then tell you the calculated premium based on the cover amount decided. Then you need to decide the policy type.

As stated above there are two types of policies, Child plan ULIPS and Child endowment plan. In the ULIP plan you will get to decide in which instruments to invest your money and in the endowment plan the company itself will invest in the debt instruments.

Then you need to decide whether you want to make a lump sum payment or regular payments. Once you have decided the payment frequency, you can start your policy by paying the premium.

Next, if due to any unfortunate event the insured (parents) die, the company will pay a portion of the maturity amount to the child annually until maturity. All the premiums payable after death shall be waived off. On maturity, the full cover amount will be given to the child.

If the insured outlives the policy term then the full cover amount will be given to the child at the end of the term. Also, if there is any mid-term requirement, parents can withdraw amount from the corpus.

Features of a child plan

A child plan has the features of both insurance and investment,

1. Premium amount

For every child plan you need to pay a premium amount which is based on the maturity benefit you opt for.

2. Premium payment mode

Payment of premium is at the option of the policyholder. You can pay a single lump sum premium or you can pay regular premium, which can be annual, half-yearly or quarterly.

3. Policy term

The policy term depends on the child’s age at the time of taking the child plan to determine the stages of his life where he will need the money and how much will he need.

4. Maturity amount

The maturity amount is received either at the end of the policy term or on the death of the parents. Also there is an option to withdraw the amount after 5 years depending upon the requirement of the child.

5. Waiver of premium

In the unfortunate event of the demise of the parent(s), there is waiver of premium benefit where the child gets a regular payment from the maturity amount and a lump sum amount is paid at the end of the term, also the premium payment liability is waived off. The policy will not lapse until maturity and the company will bear the premium charges.

6. Partial Withdrawal

The money can withdrawn for the corpus after 5 years depending upon the requirement of the child, be it, college fees for higher education or medical illness or marriage. 

Advantages of a child plan

1. Child’s education

A child’s education cost can be expensive. With the high rate of inflation, the college fees is also rising. If your child wants to apply for higher education in a premier college, it can turn out to be very expensive and arranging for funds at the last moment becomes difficult. With child plan taken during the early years of a child, you can accumulate enough to finance the child’s education without any worries.

2. Medical Treatment for child

If in any case, the child needs medical assistance, which is expensive, child plan taken at the right times comes to rescue. By investing in the child plan not only due to save money through accumulation but you also get added returns. This corpus made from investment can be used to provide worry-free medical assistance to the child since the financials will be taken care of.

3. Financial support in the absence of parents

Child plans come with insurance benefit wherein if a parent dies, the child will get the maturity amount at the end of the policy term. Along with this, the child will also get annual payments every year from the year of demise to sustain regular life, and all the premiums thereafter will be waived off.

4. Collateral security

The child plan is accepted as a valid security against loans. In case you need emergency funds, you can use the plan to raise funds.

Deciding factors in selecting the best child plans

Claim Settlement Ratio

This ratio defines the company’s claim settlement records. It means out of the all the claims applied for how many claims were actually granted. Higher the ratio higher the claim settlement. Choose an insurer with high claim settlement ratio.

Cover Amount

The cover amount depends on the age of the insured, income and other factors. Compare different plans with different banks to select a plan that offers maximum cover amount to safeguard your child’s future without burning a hole in your pocket.

Policy Term

Select the maximum term for a child plan so that it provides financial safety to your child for as long as possible, even after he attains maturity. Comparing various child plans will help you to buy a plan that ensures the longest policy term at lowest prices.

Terms & Conditions

The terms and conditions for every insurer varies and that is where it depends whether you’ll benefit out of a plan or not. Always read the fine print carefully and study them in detail.

Add-on Benefits

Apart from the basic plan benefits, different insurers offer riders and benefits at a slightly extra cost. Also, while some insurers may offer a few benefits under the basic plan features, some others might charge an extra premium for the same. Comparing can help you select the best plan with maximum benefits.

Maturity Benefit

The best child plans are those that offer maximum maturity benefits based on the premium paid. This should be the scenario whether the insured passes away during the term of the plan or outlives the term.

Premium Amount

Based on various factors and individual insurer’s priorities, the premium changes for different child plans even if the cover amount and the term of the plan are same. Look for the different premium amounts by insurance providers to make an informed decision.

Having a child is a blessing and every parent wants to provide the best to their child. As the child grows up he has many needs, such as education, higher education, marriage etc. Make good use of all the information take an informed decision.

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and is an expert in helping people save Taxes legally. He can be reached by booking an appointment for Tax Advisory Service.