Starting a family is one of the most joyous moments in life. But becoming a parent is also a huge responsibility. So when you have a child, she becomes your top priority. And as a parent, it would be a nightmare to leave your children without ensuring that their future is secured. This is when you start looking for a sound investment-cum-protection plan for your child.
But buying a plan to safeguard your child’s future is no child’s play. After all, it’s about your child’s future and you really need to know what you are buying. So we list down a few tips that you must remember before you buy an insurance cover for your child’s future.
You should always buy a child plan as early as possible because a child plan provides a long horizon to invest, facilitating you to methodically build a corpus. In a child plan, insurers offer payouts at important life stages such as higher education, marriage among others when he turns adult from 18 years and onwards. The payouts happen depending upon our requirement of corpus. Besides, at present, insurance companies offer child plans mostly with maturity benefits. So, choose a child’s plan such as a low-cost ULIP, which encourages long term investment.
To better explain this, let’s say if you want to build a corpus of Rs 1 crore for your 15-year-old child’s future till she is 25, you can get a ULIP child plan at a monthly premium of Rs 45,000 for 10 years. Let’s assume your funds will grow at around 12-13%, thus, you will get a return of nearly Rs 1 crore when she turns 25. Buying early gives you more years for the money to compound & reach your target corpus, Hence investment amount every year would be less.
Now let’s apply the same scenario for your younger child who is 5-year-old. You buy a child cover for him till he turns 25 years. You monthly premiums would be roughly around Rs 10,000 while the returns would be over Rs1 crore. For instance, if today, a wedding costs about anywhere between Rs 20 lakh to Rs 30 lakh. By the time, she grows up, the costs of a wedding would have reached Rs 1 crore after 20 years. In such a case, buying early would have built the required corpus to meet these expenses and thus it would be both wise and economical for you as a policyholder. Besides, the younger the child, the higher is the returns on this plan.
You are buying a child plan because you want to secure your child’s future. But a child plan will not be of much use to them, if the size of the cover is inadequate. It is important that you calculate your liabilities and take into account important factors such as inflation. For instance, if today higher education costs about Rs 20 lakh, then considering the current rate of inflation at 7% factor in inflation, the cost of higher education after 20 years would be easily around Rs 80 lakhs. Thus, buying a ULIP child plan that offers a sum assured (or target corpus) of Rs 30 lakh will not be suffice. In fact, in such a case, you must buy a minimum of Rs1 crore in order to cover other costs such as marriage.
Watch out for riders
The biggest rider that you must remember to look out for is premium waiver option. Under this rider, your policy will continue till the end of its tenure despite your untimely death. Basically, in the event of your death, your children will not only get a lump sum death benefit but the policy will also continue as the insurer would be paying the premium on your behalf for the remaining years of the tenure. Hence, your child’s future will be totally secured till the time the policy lasts.
However, the catch here is that while all insurers offer this rider, a few also offer it for serious illness or permanent disability. Thus, if tomorrow you are diagnosed with some critical illness or have been left permanently disabled due to an accident, it would be nice to have your back covered by the insurer who not only pays your family a lump sum amount in such a circumstance but also pays the premium on your behalf till the end of the tenure.
Under a ULIP child plan, an insurer would invest your money in the market depending on your risk appetite. You obviously get to choose your investment strategy i.e. equity, debt or balanced funds. If you feel you are more vulnerable to market fluctuations, you always have the option to switch fund. And while it is true that the premiums for a child plan may seem high as they offer additional ‘waiver of premium’ benefit which normal ULIP’s don’t, however, it is worth the bet for your child’s future. After all, every parent wants to see his child rise and shine in the world.
-by Tarun Mathur, Head of Life Insurance, Policybazaar.com...