A child insurance plan focuses on building a corpus for future financial needs of the child, while at the same time, providing financial protection from any unforeseen event like the parent’s demise.
Here is how a Child Insurance Plan works:
- Choosing and Buying the Most Suited Plan: Parents or guardians select a child insurance plan based on their financial goals, premium-paying capacity, and desired coverage amount.
- Regular Premium Payments: The policyholder pays regular premiums towards the plan as per the frequency and mode selected.
- Investment: A portion of the premium goes towards providing life insurance coverage for the policyholder, while the rest of it is invested by the insurance company to build a corpus.
- Growth of Funds in ULIP: In ULIPs, the investment grows according to the performance of the funds selected.
- Growth of Corpus in Traditional Plans: The corpus for the maturity benefit grows as per the terms of the traditional plans.
- Maturity Benefit: On maturity, the policyholder receives the maturity benefit.
- Traditional Plans: In case of traditional plans, the maturity benefit is either guaranteed or non-guaranteed amount as per the policy.
- ULIPs: In ULIPs, the maturity benefit is the fund value of the policy on maturity.
- Death Benefit: In the unfortunate event of the policyholder’s demise during the policy term, a death benefit is paid to the nominee.
- Premium Funding / Premium Waiver: Most Child Plans provide premium waiver or premium funding after the death of the parent (policyholder) to ensure that parent’s savings for desired goal of child’ bright future continues uninterrupted even in insured parent’s absence.
- Flexibility: The ULIP Child Plans offer the flexibility to choose or switch between different funds based on the policyholder’s risk appetite and financial goals.
- Riders and Additional Benefits: Riders can be added to the plan to enhance its coverage benefits. Some plans also provide benefits like income benefit and loyalty additions.
To understand the working of Child Insurance Plan better, let’s consider the case of Nikhil. A software engineer, staying in Delhi with his wife and a daughter who is turned 5-year-old last month.
Nikhil bought a ULIP Child Insurance Plan on her daughter’s 5th birthday to cover up for her higher education. He plans to invest Rs. 1,00,000 per annum over a period of 15 years. His policy has a death benefit of 12 lakhs.
Case 1: When Nikhil survives the policy term, he will receive the fund value of his investment. Depending on his policy feature, he can opt to receive it in lumpsum mode or regular payouts.
Case 2: In the unfortunate case of Nikhil’s death during the policy term, his daughter will receive the death benefit which is 12 lakhs here. The policy, however, will continue after this for the remaining policy term. The future premiums would be funded by the insurer and his daughter will receive the fund value on maturity, in addition to the death benefit already received.