Choosing the right option for your child

Child plans help in building a corpus for the childs future needs is no hidden truth.

Child plans help in building a corpus for the childs future needs is no hidden truth. But what many of us do not know is that they provide two basic features: term insurance cover on parents life,which provides a sum assured to surviving child and regular contribution into a saving portfolio which matures to gives a financial cushion and funds to pay for college education,marriage etc. Thus helping secure the child in case anything unforeseen happens. An effective child plan helps the parents against the constraints such as inflation,and rising cost of education and also helps ensure that there is enough corpus for the child to start their dream future.

Payouts in a child plan are usually interval based or a lump sum amount in case of a Ulip. The advantage of a child plan vis-à-vis other investments is the risk cover provided by these plans. The payout is assured to the child even if the policyholder is not around.

Most child plans are structured to give specific payout at period of time so they can help provide timely corpus for:

Education

Marriage

Seed capital for business

Child insurance plans can be both traditional and unit-linked Ulips. Both these plan types are completely different in their working and also offer a policyholder different set of returns due to their construct. While Ulips are market linked and carry market fluctuation risk,the traditional plans,though are a little higher priced,offer stagnant and steady returns. Such plans are better suited for parents who do not have a large risk appetite.

Ulips should also be preferred by parents when they are looking to invest for their children who are younger in age,and also for those parents who understand the vagaries of the stock market and also believe that one bad investment would not dent their investment portfolio and they can recuperate easily from a short-term loss. Traditional plans on the other hand are priced higher when compared to other plans,but for the conservative policyholder they offer a complete set of insurance plus investment. It is no profit no loss equation as premiums paid are returned in form of survival benefits along with additions in forms of terminal,revisionary or compounded bonuses along with life cover.

By design,endowment policies invest in debt-heavy funds,ie,they invest only in approved debt or government securities,and not equities. Consequently,they cannot generate returns comparable to Ulips with an equity component. Most policies could help you with returns of around 5 per cent pa,which,at best,could go up to 6 per cent in some cases.

Ulip child insurance plans prove to be significant because over the long-term 15-20 years,equities can add considerably to the corpus you plan to build for your child8217;s needs. Parents should consider taking on some risk to counter the effects of inflation,Over a 15 8211; 20 year time frame,if wisely selected,a ULIP even with moderate equity allocations could add considerably to your child8217;s corpus. In case you have been late to start a child plan,Ulips offer greater versatility.

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As a policyholder we should always have an investment objective in mind,once we know what we need to invest for,we will also be able to judge the best possible route for the same.

Author is CMO,Policy Bazaar