To buy or not to buy child insurance plans

Who could have escaped the attention of television commercials featuring toddlers as future Peles, Elvis Presleys or Sachin Tendulkars of the world?

No, they are not promoting any energy food drinks or baby food products. These are commercials of companies who are in the business of insurance selling child insurance plans.

One of the TVCs (Education is Insurance by Aviva) is a collage of early rituals in a child's life. It opens with a south Indian ritual where the grandfather helps a two-year old girl write her first alphabet on a bed of rice grains. A baptism ceremony follows. We then see a Bengali Onnoprashon ceremony (when the kid has his/her first grain of rice) where the baby reaches out and touches the book. This is when Sachin Tendulkar enters the frame to make his point.

The message is clear as far as education goes: even Sachin Tendulkar comes across as a concerned parent.

The media marketing blitzkrieg have really made these a big draw especially with young parents. Today child plans are in every young parent's financial planning portfolio.

Whatever may be your objective: your child's higher education and/or marriage expenses or fulfillment of goals such as setting the child up for his/her business or for a trust fund for a disabled child, plans offered by various insurance companies are cut out for the role.

If you are the one contemplating buying one... then it is time that you take a serious look at these plans.

Click NEXT to read what the experts have to say the features you must look at before buying child insurance plans.

So what are most important features one should look for in a child's plan?

Harsh Roongta, CEO, ApnaPaisa says, "Assuming this is a long term investment plan (say for more than 10 years) what is important is the asset allocation (for long period some/high exposure to equity is a must) and charges (both administration as well as fund management charges)."

"In addition, the plan should also provide for something happening to you (death or critical illness) -- the financial goal should still be met -- like waiver of premium plan."

Also, since it is a long-term plan the surrender charges may not be as critical as the other charges, like say, the fund management charges. If the policy provides for automatically but systematically shifting the corpus to less risky debt funds as maturity nears, it is good, believes Roongta. But if your risk profile is extremely low than you can look for guaranteed returns though that will reduce the final outgo as cost for surety is pretty high.

Kapil Mehta, CEO, DLF Pramerica Life Insurance says, "The key aspect is to ensure adequate corpus for the child, the nature of benefit available (lump sum or spread over a period) and also to time the policy in such a way that the periodic benefits are linked to the needs of child's progression."

However Vishal Gupta, director marketing, Aviva Life Insurance advises that the best way to start planning for your child's future is to start early.

"With every year that you lose out on, you will have to pay extra premium to achieve the same corpus," Gupta says.

To begin with you can decide the corpus you wish to provide for your child's future and the time when the same should be made available. Choose the level of protection you require.

This should be reflected in the sum assured and riders (like income benefit, comprehensive health benefit and accidental death benefit) that you choose.

"This ensures that the policy continues and no matter what happens to you, your child's future is secure, and it will determine the premium you need to pay. Decide the premium payment term and frequency as per your convenience and choose the funds (debt or equity oriented) you want to invest in, based on your risk appetite," believes Gupta.

But not many of us know that allocation charges in case of ULIPs are very high. Don't you think it would be better to invest in some product with low allocation charge so that the corpus at the time of maturity is more and policyholder's child benefited more?

"Allocation charges are only one part of the product. Customers must look at the product and all its charges in entirety. ULIPs are transparent products in which the customer gets to know the different charges applied to the premium. In the medium to long term, ULIPs are cost-effective," pitches Mehta of DLF Pramerica.

Mehta however says that the key points that customers should keep in mind while opting for a child plan are that the milestones in their child's life should match the policy tenure (the regular benefits should be in line with the planned expenses for the child), if their monthly family income is adequate to cover the planned expenses and the return on investment (the fund value vis-a-vis the premium paid over the plan tenure).

"As the concept of sum assured is not easily understood in such plans, a more simplified concept is the monthly family income in which customers understand their insurance requirement and act accordingly," Mehta proffers.

So there are money back plans, which are ideal for parents planning for life stage events, like child's education, marriage or seed capital for a business opportunity.

Ideally, parents would have to set aside money separately for each event and plan their finances accordingly. A money back insurance plan allows them to combine their planning for all these events in a single avenue.

Money back insurance plans are essentially variants of endowment plans, which give you a lump sum payment at maturity. While endowment plans also serve the purpose of helping parents save for the child's future, they aren't as flexible as money back plans.

One should note that an insurance plan has its relevance in the overall financial planning as it has the ability to hedge risk (in the form of death cover). With respect to child insurance plans, the product has some additional advantages. While an insurance plan provides death cover for the parent, the child plan has some additional advantages that make it a compelling product for many.

In the case of a child plan, not only is the nominee provided death benefit but it also ensures continuation of premium for the benefit of child.

With the cost of education rising high, it is important to start investing early for your child's future but not without paying attention to above factors while choosing the plan.