InvestorQ : How exactly does a child plan work?
Deepali Khupte made post

How exactly does a child plan work?

priya Shah answered.
3 years ago

To understand how a child plan works, we must take the help of an example.

Take for instance Nisha, a single-mother to Amit, aged five years, who buys a child insurance plan for Amit for a tenure of 15 years. Nisha’s goals are clear- she wants the money to send Amit abroad when he turns 20.

Situation 1

Nisha needs a corpus of Rs. 10 lakhs. So, she purchases a traditional endowment assurance plan of a sum assured of Rs. 10 lakhs for 15 years and pays premiums every year. If, during the 15-year period, Nisha meets with a fatal accident, in say the eight year, then the plan would not come to an end.

The insurance company would pay a death benefit (usually the sum assured of Rs. 10 lakhs) immediately and waive off the future premiums. The plan would then continue for another seven years. After the completion of 15 years, the plan would mature and would pay a benefit of Rs. 10 lakhs. Thus, the child plan pays the corpus which Nisha would’ve required for Amit’s higher education even after Nisha’s death.

Situation 2

Let’s say Nisha buys a money-back plan which promises to pay 20% of the sum assured after completion of every five years. After the completion of first five years, Nisha gets Rs. 2 lakhs (as the sum assured is Rs. 10 lakhs). Thereafter, in the tenth year also she gets another Rs. 2 lakhs.

Say Nisha dies in the twelfth year of the plan. The plan pays the total sum assured of Rs. 10 lakhs irrespective of the money-back benefits already paid. The premiums for the next three years are waived off and the plan continues. When the plan matures, the promised maturity benefit or the balance amount, that is 60% of the total sum assured is again paid.

Situation 3

Nisha buys a unit-linked insurance plan (ULIP) paying a premium of Rs. 1 lakh every year for 15 years. If she dies during the plan term, the death benefit would be paid. The premiums would be waived off and the plan would continue. On maturity, the fund value is again paid which would help Nisha’s family to send Amit kid abroad for higher education, without pinching the family’s finances.