Children have a high emotional bonding with parents. Indian parents, in particular, start planning for their children’s future very early; often, it is even before the child is born. They spend a significant portion of their income educating their children, to ensure they become successful. They do not hesitate to cut down on their own expenses and provide the best education for their children. Parents need to ensure regular income to fund such aspirations.
Life is uncertain. We should consider the possibility that an earning parent could expire prematurely. Who, then, will fund the education of the children? How will the dreams of making the child one of the best professionals be accomplished? Can life insurance really help achieve this objective?
There are many reasons to buy life insurance for the benefit of children:
* Creating a corpus to meet the future financial needs of the children
* Creating wealth for them in a tax-efficient manner
* Eliminating the uncertainty related to the higher education expenses
* Reducing dependency on parents when children grow up
* Inculcating the habit of saving in children Human beings have a limited lifespan. We are a country with one of the highest cases of road fatalities. India witnesses 16 deaths, every hour from road accidents.
Our lifestyle requires us to live on credit in the form of loans and credit cards. By borrowing, we rely on expected future earnings. But, if something happens to us, the future income of the family will dry up. How will the family pay for these loans which were supposed to be repaid from an expected income? How can one fund children's education in such circumstances?
Life insurance can fill this gap and help to provide certainty to the family if the breadwinner unexpectedly expires. There are various life insurance products available to meet such needs.
Those who are financially knowledgeable may opt for a unit-linked child plan. However, people who are not as financially informed may buy traditional plans. Unit-linked products may give more freedom to choose from various asset classes and allow switching funds from risky assets with expected higher return, to assets with lower expected returns and vice versa. However, this may not be suitable to policyholders who are not aware of market conditions. The investment risk in unit-linked version of a child plan is borne by the policyholders.
On the other hand, traditional plans do not require investment decision to be taken by policyholders. The investment decisions are taken by the company’s investment experts. Traditional products also have some guarantees in the form of guaranteed sum assured and bonuses that have already accrued.
Child plans may vary from company to company. Following are some of the features of insurance plans for children:
* The nominee is paid the life cover amount immediately, to compensate for immediate loss of income.
* All future premiums of this insurance policy will be waived and fully paid for by the life insurance company.
* The policy shall continue and the child will receive the fund value/sum assured, plus bonuses, at maturity.
* The premiums may be paid for the entire term of the policy (regular pay), limited pay (5 years, 10 years, etc) or only a single premium. Insurance companies also provide monthly, quarterly, half-yearly and yearly premium payment options.
Almost all life insurance companies in India are offering children insurance plans. Clearly the objective of buying a life insurance must be to protect the family against the uncertainties and transfer such risks to life insurers. The following criterion may be used to choose your plan:
* Choose between unit-linked (ULIP) and traditional plans. Keep in mind that ULIPs provide more investment choice but come with a lot of responsibility.
* Choose a target sum assured based on the need and the affordability. The higher the target sum assured, the higher will be the premium.
* Choose the term of the policy such that the policy matures at a time when you need money for the children’s admission and payment of fees, etc.
* Some policies may allow the maturity benefits to be taken in installments; this may help you to align the cash flow better.
* One should ensure that affordability of the premium is taken into consideration. The policyholder must be able to pay the premium comfortably during the term of the policy to avoid discontinuance of the policy.
* Apart from children insurance plans, there are other insurance plans, which can be used to meet the needs. For example, a combination of endowment and term plan or a money back plan. Your adviser may help you choose plans based on your circumstances.
Buying an insurance policy for children is a critical decision. Child insurance plans help you hedge or transfer some of these risks and uncertainties and protect the future of your children. There are various plans available to meet specific needs. One must ensure that the cash-flow timing and amount from the policy match with the expected costs.
A life insurance policy is one of the best gifts one could ever give one's children. This may give the children a sense of security about their future.
Sunil Sharma is chief actuary and chief risk officer at Kotak Life Insurance.