Using Life Insurance To Plan Your Child's Future

As a parent it is your dream to see your child happy in life. You may already be nurturing plans of seeing your daughter or son in wedding attire, or seeing them reaching great heights in their respective careers. For these dreams to come true you would not want finances to become a road-block. That is where the child insurance plans come in handy. With children insurance plans you can start investing in a regular manner so that surplus corpus is available for them just when you actually need it.

Insurance plans offer lots of flexibility to the parents. Parents can get these plans customized to their needs. Generally children insurance plans are of two types: Traditional and ULIP.

Traditional -There are two categories under this - endowment insurance policy and money-back insurance policy.

Endowment policy: In this type of policy you pay till the tenure of policy is over and in the end you receive a lump sum amount which comprises of a promised fixed return (sum assured) and the bonus earned though the years. But there is less flexibly and less return on investment in this type of policy.

Money back policy: Money back policy provides much greater freedom to parents while planning for investment. In this policy also you have to pay annual premiums. But the benefit of this kind of policy is that you can foresee the situations when you would require these funds across various stages of your childs life. Like, you may need some money for his graduation, post graduation and then his marriage. With this kind of policy you can withdraw a part of the final payout for each of these events in his life. So instead of making 3 separate investments, you can plan for various milestones within the same policy. In case of death of insured parent during the tenure of the policy, his nominee will receive the full sum assured at the start of policy. That is if the policy was of Rs 20 lakh for 20 years, full Rs 20 lakh plus bonus will be paid to the nominee in case of parent's death.

Since these traditional insurance plans invest primarily in corporate bond and government securities return on investments is less.

ULIPs: ULIP provides greater flexibly to parents than money back insurance policies. In ULIP a parent can decide when and how much money he can withdraw across various stages of his child's life. Since ULIPs are market-linked there is no guarantee on return on investments. The return depends on how well you manage the risk-return portfolio. This is because ULIP invests in a mixture of equity and debt funds. Here also parents have a say about what percentage they want to put in equity funds and how much in a debt fund. If during the tenure of the policy they want to change this percentage that can be easily done through switching between investment styles.