Since child plans are the among the core offerings of most life insurance companies,

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financial planners and the insurance industry appear to be divided over the need of insurance plans for a child’s future or other alternatives.

While many financial planners and wealth managers contend that savings for a child’s future needs could be done through long-term investments in equity mutual funds, supplemented by a term insurance to cover risk of parent’s death, representatives of the insurance industry say that such a combination does not solve the real purpose of saving for children’s needs that arise at different stages of their life.

A typical child insurance plan — both traditional and unit-linked — offers long-term savings for the child’s future needs such as education and marriage and also covers the risk arising out of a parent’s untimely death. Usually, these policies that have a tenure of 15-30 years have the key features of a child insurance plan and premium waiver. In case of a parent’s death, the insurance company pays all future premiums at one time.

Yateesh Srivastava, chief marketing officer, Aegon Religare Life Insurance, said, “These days, most child plans are unit-linked insurance policies (Ulips) with the premium waiver being the only differentiator from normal Ulip products. This secures a child’s future from any financial problems arising out of parent’s death.”

Another key feature is that most child plans offer partial withdrawal after either three or five years. In case of parent’s death, the money accumulated can be fully withdrawn only after the child reaches the age of 18 years.

Himanshu Kohli, founder partner, Client Associates, a wealth management company, said since most child plans are Ulips and as is commonly known, the charges and expenses are high in such insurance plans, it’s better to go in for a term insurance to cover the risk of a parent’s death and for the savings part, investment in good equity funds makes sense. “Usually, specific insurance schemes such as child plans and pension plans are more of marketing gimmick,” he added.

However, Shekhar Bhandari, business head, tied agency, Kotak Life Insurance, said in term plans, one immediately gets the money in case of a parent’s death, defeating the purpose of savings for the child’s education. “In case of child plans, the money accumulated can be withdrawn only if the child reaches the age of 18 years, thus ensuring that money saved for a child’s education or marriage is not diverted for some other purpose,” he said. He said that with the Insurance Regulatory and Development Authority putting a cap on Ulip charges, the issue of higher expenses no longer holds water.

At present, the first-year fund allocation charges in child plans varies between 10 per cent and 30 per cent.

Sanjay Tripathi, executive vice-president and head, marketing, HDFC Standard Life, said these plans go a long way in securing a child’s future by financing the key milestones in their lives even if the parents are no longer around to oversee them.

“You can customise the ideal plan for your child by choosing the premium you wish to invest along with the sum assured, depending on the level of protection required,” he said, adding that child insurance plans also offer tax benefits under Section 80(C).