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What is meant by a childrens education insurance plan?

    IndianMoney.com Research Team | Wednesday, June 10,2009, 08:44 PM
 

The Child Education Policy is a life Insurance product specifically designed as a savings tool to provide an amount of money when child reaches the age for entry into college (18 years and above). The funds can be used to pay for your child's higher educational expenditure. Under this policy, the child is the life secured, while the parent/legal guardian is the policy owner. If one can opt for a pay or benefit rider, the education policy also provides promise that, in the event of the policy owner's untimely demise, the child will have access to the money to help finance his or her studies. Child Education Plan is a single way to save for child's future. To fulfill child's dream & aspirations, commence by making small investments in a Child Education Plan for a short tenure and receive regular payouts for the rest of the tenure in child’s future for a fixed period of time.

Primarily there are two type of child insurance. They are;

  • Insurance for the Child life
  • Insurance for protecting Child future

Average size of the households that save for children education is 5.5 members with an average of 1.5 children going to school. These households spend around 5.2 to 5.5 per cent of their income on education expenses. On an average these households save another 10 to 12 per cent of their income for children. If your child is in kindergarten, you can invest commonly for the next 5 years and this Investment Plan will take care of his primary education. If your child is in secondary school, make a small investment every month for the first 6 years, in a plan of 10 years’ tenure and get a reasonable annual payout for the next 4 years and fulfill your dream of seeing child graduate from a great college.

Child Plans basically work like an endowment plan. Which means, on maturity of the policy, a fixed amount is returned to the parent. This is how it works. The parents pay a premium for a policy. This policy is operational for a number of years. If the parent dies, the child gets the sum assured (amount the policy has been taken out for). If the parent survives, the sum assured is handed over on maturity of the policy.

If you want a huge lump sum when their child turns 15 and is all set to go to college. So you should buy a 15-year policy when your child is born. When your child turns 15, you will get the money and can use it for whatever education expenses you saved it for. Such policies cover the life risk for a particular period and at the end of this period, the sum guaranteed is paid back to the policy holder.

Basic Types of Child Plan

Basically there are two kinds of Child plans; Endowment and ULIP

Endowment policy

  • An endowment policy combines a savings component with protection coverage.
  • Endowment policies may be either participating or non-participating.
  • Non-participating policies do not participate in the life Insurance fund’s profits but all insurance benefits are fully guaranteed.
  • Participating policies have a portion of Insurance benefits guaranteed, however the total amount of benefits at maturity is not guaranteed because it depends on the insurance company’s life insurance fund’s performance

ULIP

  • A Unit-linked policy combines the elements of investment and protection based on your requirement as the policy owner.
  • It offers flexibility as you are able to increase or top-up your monthly premium contribution as your income improves. You may also be more aggressive with your investment.
  • An Unit-linked policy will allow you to choose the types of funds your money will be invested in. However, like any other investment, there are risks involved and there is no guarantee on the returns, which may be higher or lower than the amount projected.

ULIPs under Child plan

ULIPs vary from conventional insurance in the way they invest your premiums. Unlike endowment plans that invest mainly in government securities and corporate bonds ULIPs can also invest in equities.

Below, we have summarized some of the key features in a ULIP

  • As an investor can make a decision how much your ULIPs must invest in equities and debt. For this ULIPs offer a range of choice with varying equity and debt components. As an investor you can prefer the option based on your risk appetite.
  • Unlike conventional endowment plans, ULIPs do not guarantee a return; although sum assured is guaranteed provided if one have paid the minimum premiums (even conventional plans no longer assure a return). This is because ULIPs invest in equity and debt markets and offer market-linked returns. Your returns will vary in line with the ULIP's performance.
  • ULIPs are flexible. Their flexibility is evident in two features. One, they allow individuals to switch across options. For example, as a parent you can afford to have more equity at an early stage of your investment plan for your child's education. As your plan nears the end of its tenure, one can shift their monies to a debt option. Most insurers allow for a determined number of free switches across ULIP options every year. The second feature that makes ULIPs flexible is that they allow for a larger number of withdrawals. In the money back illustration; there were four payments with a bonus payment at the end of the tenure. In a ULIP you can make many more withdrawals over the tenure of the plan; in fact some ULIPs permit multiple withdrawals every year.
  • ULIP expenses are usually lower than those of conventional endowment plans. Over the long-term, this reflects in the returns of the ULIP.

What is Investment Phase!

Investment phase means the period chosen by the Depositor for which deposit of the Installment shall be made by such Depositor which shall begin from the date of payment of the first premium and subsist till the payment of last premium.

3 Easy Steps to Choose the Best Child Plan

  • Collect all the requisite information about the policy
  • Get & compare offers from major Insurance Companies
  • Choose the Insurance Plan that best suits your child’s dream

Factors to be considered for the Best Child Plan

While taking a children’s plan make sure that the following features are attached in that.

  • Affordable premium.
  • Choose a policy that gives you flexibility so you can gradually increase the savings in the future.
  • Ensure that you opt for the pay or benefit rider.
  • Adequate Sum required for your child’s Higher Education Cost.
  • Rider Benefits like Health Insurance, Accident cover
  • Competitive Pricing and Returns
  • Assured amount for Children in case of Parents Death.
  • Claim History of the company you are purchasing insurance from
  • Consider how much money you want to set aside for your child’s education.
  • Less administrative Costs

Importance of planning for your child's future

As human beings, every parent/s vision is to facilitate the best potential upbringing for their child/children and assure the best of future for them. There are hardly any stronger desires than providing the best of everything for their child/children. As a parent, the most obvious of the dream would be to plan for your child/children in such a way that all their future necessities are properly taken care of and there is no running around at the time when the actual necessity arises. And for a proper plan to be in place we need to take into account all the realities of the times that we are living in.

As the saying goes 'Time and Tide waits for nobody', very soon parents of young child/children would realize that they are staring at times when a particular necessitate of their child/children is staring them in the face and they are found wanting in terms of how to deal with that need. Other event that assumes equal importance is the wedding of your child/children. A back of the envelope calculation will reveal that monetary requirement for wedding/s will certainly not be less than what you may need for higher education. Starting early and consistency in savings are the two key factors in achieving child's successful future planning.

Planning for child's education

There was a time when parents didn't have to plan much for their children's education. The choices were limited in the field of education and even these costs were mainly subsidized. Things are significantly different in the current scenario. Education cost has been rising at a faster pace than inflation, largely due to increasing opportunity and students have begun to explore opportunity abroad. As a result, parents have to support themselves for a larger corpus if they don't want to deprive their children of pursuing their welfare.

If one can take into account other costs such as marriage, (which is applicable both for boys and girls) the future amount could well run into lakhs or even a crore, over a period of 15-20 years. Hence, parents are better off if they plan for their children at an early age. The choice of product, often, depends on the risk desire and ideally, one should have a good balance of risk and safety when it comes to Planning for a Child's Education. Also, the threat factor depends on the tenure and the availability of time. For instance, if a parent starts planning early and has a time horizon of more than 10 years, he has the luxury of assigning a higher amount to equity and the same does not hold well when the time left is just 1-2 years.

Tips while Buying a Child Education Plan

1. Ensure that you opt for the payer benefit rider


Look for a policy that waives premium payment in the event the parent/legal guardian can no longer pay for the policy, arising from events such as unfortunate death, diagnosis of a critical illness or total and permanent disability. By opting for the payer benefit rider, your child's education fund will be taken care of should anything happen to you as the parent/legal guardian.

2. Monitor the funds


After you buy a policy, you need to monitor it to ensure that you are on your way to reaching your goals. Actual returns declared by the insurance company may differ from initial illustrations due to changes in financial markets. You may also find that the actual cost of higher education may differ as the course selected by your child is different from the one initially planned, or currency exchange rates may rise and fall if an overseas education is preferred. If there is a deficit in the funds required, some policies do provide an additional benefit of a study loan.

3. Check whether the policy qualifies for tax incentive


One of the advantages of using life insurance as a savings tool for a child's education policy is the tax benefit. Insurance proceeds are tax-free and you can also obtain an annual tax relief for the payment of premiums for education insurance.

4. Make sure that the premium is affordable


Saving through Insurance disciplines a person to regularly continue putting aside money year after year. It is a long-term process and therefore, you need to be practical in estimating how much you can afford based on your current income and expenses. If you start on an amount bigger than you can afford, you may end up having to terminate the policy early and invite financial loss. So, if you cannot afford much now, start with a small amount.

5. Do not add unnecessary coverage


Many Children’s education policies also offer the ability to add insurance coverage like hospital and surgical medical insurance, or critical illness coverage. Be careful about adding too much insurance coverage as the costs will affect the amount of savings. Furthermore, bear in mind that you are insuring the life of your child, and certain coverage like critical illness may not be essential as the likelihood for such illness in children may be minimal.

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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