What is a Child Endowment Policy -Children Education Plans?
The future is uncertain and no one knows how it will unfold. It is best to be prepared. One remembers the famous saying by Mahatma Gandhi "The future depends on what you do today". The bundle of joy instills in one a sense of responsibility. High prices define the present. Children’s education, hospitalization, marriage is so expensive that one does not know where the funds will come from. God forbid if something were to happen to the breadwinner of one’s family how would the spouse manage the additional financial responsibility as well as bring up the child .Surely a child endowment plan is a must have in ones insurance portfolio.
What is a child endowment policy?
A child endowment policy is a traditional life insurance plan which offers protection as well as savings or an investment benefit. A participating child endowment plan is also called a “with profits plan.” In a participating plan one can choose a sum assured against which a premium is paid. This sum assured is a guaranteed payment on the death of the parent or when the child attains maturity .In addition to the guaranteed amounts one can obtain periodic bonuses. All premiums are pooled together and bulk of the corpus is invested in fixed income securities. About 90% of the profits realized are distributed as bonuses to the policy holders. About 10% of the amounts might be retained by the life insurance Company. These are also called non guaranteed returns. The bonus amounts might be paid on an annual basis or at periodic time intervals. An additional bonus known as a terminal bonus might be paid in the final year of the policy. In these polices returns are evened out and paid as bonuses .In periods of good returns any surplus amounts may be retained and the remaining amounts paid out as bonuses .These retained amounts might be paid out as bonuses when the policy is not doing too well. This smoothens returns over the life of the policy .Certain polices pay a one off performance bonus on the surrender of the policy or at the time of a claim.
Children Education Insurance Plan:
How does a child endowment plan work?
One knows that a child endowment plan may have a premium paying term of 10-15 years. The policy matures when the child is 18-24 years of age. If the policy matures when the child is 18 years of age 20% of the sum assured is paid out at that age with the remaining sum assured amounts paid over gradually till the child attains the age of 22 years. Bonus amounts in case of a participating plan might accrue from the sixth or seventh year that the policy is in force and all these amounts accrue and are paid at the end of the policy term. A terminal bonus might also be paid in the last year of the policy. The bonus depends on Company performance.
A child endowment plan is unique as it has a clause that if the parent were to die before the maturity of the policy one’s child would still be taken care of. In India child endowment plans are taken with a waiver of premium rider. The premium amounts might be slightly higher as they provide a unique benefit. This policy has a sum assured or a guaranteed payout made in case of the unfortunate demise of the parent before the maturity of the policy .The insurance Company then bears the remaining premium payments till the maturity of the policy. At the time of the maturity of the policy a second guaranteed lump sum is paid out.There are twin payouts in this policy .One at the time of death of the parent and the other at the maturity of the policy. In addition if the plan is participating in nature bonuses accrue at regular intervals .It is very important to opt for a waiver of premium benefit in these plans to tap in the twin payouts.
- Mr Arvind purchased a participating child endowment plan for his three year old son with a waiver of premium benefit. He paid a premium of INR 30000 where the sum assured was INR 15 Lakhs and maturity benefits of INR 40 Lakhs. The policy would mature when his child attained 21 years of age. He took a waiver of premium benefit rider for which he paid an additional INR 2000.The waiver of premium states that all future premium payments will be waived off in case of death or disability of the policy holder.
- Unfortunately Mr Arvind passed away in a car accident after paying 7 premiums. On Mr Arvind’s death his wife received the sum assured of INR 15 Lakhs from the insurance Company. The future premiums of INR 32000 for the next 11 years would be paid out by the insurance Company.
- On maturity of the policy when her son attains 21 years of age the amount of INR 40 Lakhs and all accrued bonuses would be paid by the life insurance Company as the policy was a participating policy. This amount could be used for higher studies by her son when he is 21 years of age.
What are the salient features of a child endowment policy?
- The minimum age ones child is eligible to enter this policy is 91 days and the maximum age of entry can be 13-15 years depending on the policy chosen.
- The minimum sum assured can be INR 1 Lakh and the maximum amounts can be INR 1 Crore with certain plans having no upper limit.
- A child endowment policy might have a maturity age of 18-24 years depending on the policy chosen. On attaining maturity the child gets the sum assured as well as any bonuses which accrue. These amounts can be used for ones child’s marriage or higher education.
- The premiums paid for these policies are single premium or a regular premium and depend on the sum assured.
- If the child dies before the maturity period all the premiums paid as well as the interest on them and the accrued bonuses if any are paid back by the insurance Company to the policy holder namely the parent. Consequently there is also an option to nominate another child or a person and the policy will continue with the same benefits as before payable to the new nominee after the death of the life assured during the term of the policy.
- If the parent dies and the waiver of premium rider has not been taken then the policy can be continued on payment of further premiums until the maturity of the plan.
- If the life insured namely the parent commits suicide within one year from the effective date of coverage then the insurance Company will only refund the premium without any interest minus any expenses incurred by the life insurance Company.
- The premiums paid are tax deductible as per Section 80 C of the income tax act up to a maximum amount of INR 1 Lakh and the proceeds received on maturity of the policy are tax free under Section 10 (10D).
- One needs to pay the premiums for at least 3 continuous terms for the policy to have a guaranteed surrender value .This amount is 30% of the total premium paid excluding the premium paid in the first year of the policy.
Riders in Children Education Plans:
What are riders in a child endowment policy?
- Death and disability benefit rider: A child endowment policy is available with a death and disability benefit rider on paying a slightly higher premium. Many a time a policy might have a premium paying term of around 10-15 years and the policy matures when the child is 18 years of age. If the parent dies or is disabled before the end of the premium paying term the remaining premiums are waived off and the maturity amount is paid when the child attains the age of 18 years. If the parent dies or is disabled after the premium paying term but before the maturity date of the policy 50% of the sum assured is paid immediately and the remaining benefits accrue once the child attains the age of 18 years.
- Critical illness rider: On payment of a slightly higher premium a critical illness benefit can be obtained in a child policy. The critical illness rider sum assured will be paid by the insurance Company on diagnosis of the critical disease. The critical disease could be a heart attack, stroke, cancer, kidney failure as specified by the policy. The critical illness rider sum assured is equal to the basic sum assured and is payable to the life assured namely the parent before he attains the age of 60 years. If a waiver of premium rider is taken, then on the life assured or the parent contracting an illness he obtains the critical rider sum assured and all future premiums are waived off.