When you pay the premium for this plan, part of the
premium amount goes towards paying for the life cover. Remaining part of the
premium is invested in various instruments either debt or equities. However
this portion is quite small, as the insurance companies tend to deduct premium
allocation charges upfront. These charges are meant to pay the distributor
commissions. As a result, very small part of the premium gets invested during
the initial years.
You have welcomed your new bundle of joy in this
world with a lot of enthusiasm. You intend to give them the best of everything.
In order to help you achieve this objective, you start investing in various
instruments on your child’s behalf. To capitalize on the parents’ intentions
about giving the best for their children, many insurance companies have
introduced children’s plans.
These plans have enticed many parents to invest on
behalf of their children, under the impression that their child’s future is
secure. But is it true? Are they worth investing? Is this the best investment
option for your child? Let’s take a look at what these plans are all about.
- What are children’s plans?: Children’s plans are
insurance-cum-investment plans offered by insurance companies are similar
to ULIPs. However the difference between a ULIP and a children’s plan is
that the parent starts investing in the Best
Child Insurance Plan right from the time the child is born and can withdraw the savings
once the child reaches adulthood. Of course, some plans do allow
intermediate withdrawals, at certain intervals.
- How much insurance do I get?: These plans do come with
inbuilt insurance component in order ensure the sum payable to the child
is insured against the premature death of the earning parent. The least
life cover you have to select in these plans is: Sum Assured = Term *
Annual premium / 2. But in most instances this sum assured is inadequately
woeful. Experts recommend that it is necessary to buy a life cover
of minimum of 7-10 times the annual income of the earning parents. This is
to ensure that in case if the earning parent meets untimely death, his/her
spouse and the child are adequately provided for. So if you are relying
only on the life cover provided by these plans, then remember you will
always remain under insured.
- What about the investment?: When you pay the
premium for this plan, part of the premium amount goes towards paying for
the life cover. Remaining part of the premium is invested in various
instruments either debt or equities. However this portion is quite small,
as the insurance companies tend to deduct premium allocation charges
upfront. These charges are meant to pay the distributor commissions. As a
result, very small part of the premium gets invested during the initial
years. Also if you opt for any features provided by the insurer like
waiver of premium, switching option etc., the charges for the same are
deducted from the amount invested. So the returns from these Chid
plans tend to be very low in the initial years and if you stop the
plan without completing the entire tenure, you might end up suffering
loss.
- Disadvantage of the children’s plans: These plans do rate
poorly both in terms of life cover and investment option. You can buy
plain term insurance at lower premium that provides you with very high
life cover. For investments, equity mutual funds are the best. You can
invest the highest possible amount in these funds at very low fees. Also
if the fund tends to perform poorly, you can stop your investment and
switch over to another fund, without paying any penalty. This is not
possible in case of children’s plans as there are heavy surrender charges
applicable.
- Are they right for me?: One needs to evaluate if
they are an ideal option. More often no they are not. While they do
provide you with tax benefits, you can get the same tax benefits with a
combination of term insurance and mutual funds. Also, term insurance +
mutual fund combination beats the children’s plans on the fronts of costs
and returns. So it is better to give these plans a miss and instead go for
term plan and mutual fund.