Child savings and insurance plans could broadly be classified as child ULIP plans, child endowment plans and money-back insurance plans.
Child savings plans could be financial products that help parents save or build a corpus for the child’s future financial needs. Such needs could be higher studies, professional courses, marriage, and other planned expenses.
Depending on the product, child savings plans could help build a corpus through savings or investment products. In this scheme, the parent/policyholder is expected to pay the premium amount at an agreed frequency. This could range from a monthly, quarterly, half-yearly, or yearly basis. A child savings plan could help parents structure their savings according to their long-term financial goals.
The life insurance company would offer the policy benefits as per the plan chosen by the parent. The policy benefits could include a maturity amount, regular payouts, or both.
Depending on the need and requirement, the maturity amount could be used to meet the child’s future education expenses, professional course fees, marriage expenses, or other financial needs.
The premium amount to be paid by the parent, the policy term, the amount of corpus, product structure, charges, and benefits of the policy would depend on the insurance product and the policy document.
Child savings and insurance plans could broadly be classified as:
Child ULIP or Unit Linked Insurance Plans are products that provide life coverage and a feature to invest in market-linked instruments like equity and debt. A certain percentage of the premium is used to offer life cover, while the remaining amount, after the deduction of applicable charges, is invested in the chosen investment funds.
Depending on the insurer, the fund manager offers equity-oriented, debt-oriented, and balanced funds for the policyholder’s choice. As the investment amount is subject to market risk, the value of the investment corpus could increase or decrease over time.
Child endowment plans are traditional life insurance products that offer life cover and savings. Depending on the product, the plan may offer a guaranteed sum along with bonuses, if applicable, on policy maturity.
Some endowment products could offer a lump sum maturity amount, while some may also have a feature to claim regular payouts. Child endowment plans have a lower risk profile as compared to market-linked investment products, as the maturity amount is not directly dependent on the performance of the stock market.
Money-back insurance plans are non-linked life insurance products. A certain percentage of the sum assured is paid out as survival benefits during the policy term, and in case of the life assured's death, the maturity amount is paid on the completion of the policy term.
In a child savings plan, the money-back feature could help meet planned expenses during the child’s growing years. The amount and frequency of the survival benefits depend on the plan.
Parents could consider starting to save for their child from an early age. Starting to save for children’s future needs early could give the parents ample time to accumulate the required corpus. It also gives parents the option to pay smaller amounts over a longer period instead of paying a lump sum amount closer to the financial goal.
Making regular contributions could give parents an opportunity to stick to a systematic savings plan. Parents should ensure that the chosen premium amount and the payment frequency are affordable to avoid discontinuance of the policy.
Depending on the structure of the savings plan, child savings plans could enable building a long-term corpus. The corpus could be used to meet future financial needs of the child as determined by the parents.
Depending on the product, market-linked savings plans would depend on the performance of the underlying assets, while traditional life insurance products would pay out benefits as per the terms and conditions of the policy document.
The parent should identify when the corpus or lump sum amount would be needed. Depending on the child’s age and the timeline to reach the target age, insurance products could be chosen to suit the financial needs.
Depending on the product, the corpus could be built over the term of the policy and paid out on maturity or during the term of the policy in the form of regular payouts.
Parents must be aware of the purpose of making the premium payments. The purpose could be to meet educational expenses, professional course fees, marriage expenses, or any other financial need.
Depending on the purpose, the corpus could be estimated.
Given the age of the child and the anticipated time for the financial need, the parents should get clarity on the policy term. The policy duration should ideally align with the financial needs.
The parents should choose an affordable premium amount to avoid discontinuance. Such financial planning could avoid the risk of losing the invested amount or surrendering the policy before maturity.
Market-linked investment products come with risks and rewards. Given the performance of the market, the returns could increase or decrease over time. Parents should review the investment funds, historical performance, investment strategy and applicable charges before choosing the product.
While products offering guaranteed benefits are attractive, such benefits should not be confused with guaranteed returns on investment. Parents should review the product in terms of guaranteed and non-guaranteed benefits.
Parents should review the insurance company’s claim settlement ratio to identify the ability of the insurer to settle claims. Furthermore, it is advisable to review the charges applicable to the policy, the exclusions, and the overall terms and conditions of the insurance product.
The product structure, terms and conditions, and the benefits must be reviewed thoroughly before buying the product.
The cost of future financial needs can increase over time. Parents should consider the future needs of the child as opposed to present-day expenses. The corpus should be created to reflect future inflation-adjusted needs.
A child savings plan could be a way to prepare for the future financial needs of the child while having the added benefits of life insurance cover, depending on the product chosen. It is important to compare child savings plans in terms of the policy term, premium amount, payout structure, investment risk, liquidity, life insurance benefits, charges, and tax implications.
Most importantly, the financial plan should be aligned with the child’s anticipated financial goals and the affordability of the parents.