Child insurance plans suit risk-averse parents seeking assured goals

Those prioritising higher returns and greater flexibility may prefer term cover with mutual fund investments

ICICI Prudential Life Insurance recently launched ICICI Pru SmartKid 360. Several other insurers also offer these plans, designed to help parents build a corpus for key milestones such as higher education and marriage. These plans position themselves as a single solution that combines long-term savings with insurance protection.

 

How these plans work 

Child insurance plans are structured for long-term, goal-based savings. “The plan provides milestone-based payouts aligned to the child’s age, often around 18 or 21, when education expenses peak,” says Vikas Gupta, chief product officer, ICICI Prudential Life Insurance Company. These plans also offer a maturity benefit at the end of the policy term. Some plans allow partial withdrawals at key academic stages, such as college admission.

 

“The parent typically acts as the policyholder and life insured, while the child is the beneficiary,” says Anup Seth, chief distribution officer, Edelweiss Life Insurance.

 

These plans are available in two variants. “Parents can choose between guaranteed benefit options, which prioritise certainty, and market-linked variants aimed at long-term growth,” says Madhu Burugupalli, head – product management and strategy, Bajaj Life Insurance.

 

Premium waiver benefit, which can be an in-built feature or must be purchased as a rider, is a defining feature of child insurance plans. “In case of the unfortunate demise or permanent disability of the parent, all future premiums are paid by the life insurer,” says Gupta. The policy continues till maturity. The life cover amount is paid to the nominee, while milestone payouts and maturity benefits remain intact.

 

Disciplined savings, goal protection 

Child insurance plans appeal to investors seeking disciplined, long-term savings combined with protection. Premiums must be paid at predefined intervals, resulting in forced savings. “Regular savings over a long period allow compounding to grow the corpus,” says Burugupalli.

 

These plans also protect specific goals such as children’s education and marriage. “Parents can ensure fruition of goals even in their absence,” says Gupta.

 

Guaranteed savings plans offer assurance, which many risk-averse parents value for non-negotiable goals such as education. “They allow parents to lock in today’s high interest rate for the next 10–20 years, which is especially valuable in an environment where interest rates are on a declining trend,” says Seth.

 

Low returns, lower flexibility 

Child insurance plans have notable limitations that investors should be aware of. Traditional variants deliver relatively modest returns. “Traditional plans typically offer returns in the range of 4 per cent to 6 per cent annually, which would fall short of education inflation rates of 10 per cent to 12 per cent,” says Abhishek Kumar, a Securities and Exchange Board of India (Sebi)-registered investment adviser and founder, SahajMoney.com.

 

These products also lock policyholders into long-term commitments and offer limited flexibility. Market-linked versions carry their own risks, as returns can fluctuate in the short term.

 

An alternative approach 

For many investors, a combination of term life insurance and mutual fund investments may offer a more flexible solution. “Term insurance provides high life cover at low cost, while mutual funds invested through systematic investment plans (SIPs) offer better liquidity and possibly higher returns over the long term,” says Kumar. In the event of the parent’s death, the term plan payout can fund education and other goals.

 

Who should consider them 

Despite their limitations, some people may go for child plans. “Child plans suit risk-averse parents with limited discipline who prioritise guaranteed coverage and peace of mind over returns,” says Kumar.

 

Ranjit Jha, managing director and chief executive officer, Rurash Financials, says these plans work for parents with a steady income who are serious about planning for their child’s education.

 

Parents with a different profile can avoid them. “Financially savvy and disciplined investors who are comfortable maintaining systematic investments and seek higher returns and flexibility may find the term insurance plus mutual fund route more suitable,” says Kumar.

 

Choosing the right plan 

Parents who decide to go for a child insurance plan should check a few parameters. “When selecting a plan, parents should evaluate the amount of life cover and the investment horizon,” says Aditya Mall, appointed actuary, Generali Central Life Insurance.

 

Jha suggests checking whether the waiver of premium benefit is available and whether the payout schedule is flexible and meets the child’s needs. He also says the insurer’s claim settlement track record deserves attention.

 

Points to remember 

These plans, if purchased, should be bought early. “Buy them as early as the child’s birth or latest by the age of five,” says Mall. Starting early allows time and compounding to work in favour of the investor. Starting late means higher premiums and less benefit from compounding.

 

Jha cautions that parents must realistically estimate future education costs and factor in both general and education-specific inflation. Market-linked options require a longer horizon and regular monitoring to ensure performance stays aligned with rising costs.

 

Finally, investors should not treat child insurance plans as pure investment products. The returns from these plans, especially the traditional variant, are likely to fall short of the returns from pure investment plans, as they are a mix of protection and savings. Jha also emphasises comparing options across insurers instead of buying the first plan that is pitched.

 

The writer is a Mumbai-based independent journalist

 

Charges and other key checks

• Key charges that must be checked include premium allocation charges, administration fees, fund management costs and mortality charges
• Unchecked charges can materially reduce long-term returns
• Clarify surrender charges
• Enquire about the impact of early exit