This article explains the basic concept of a child plan, as is available in the market today.

What is a Child Plan?

It has typically two components to it:

* A life insurance on the parent
* An investment vehicle that accumulates your savings on a regular basis and pays it back around the time the child reaches college (typically when he/she turns 18-21)

These two components are thus very different in what they achieve to secure the child’s future, and any analysis must keep this distinction in mind at all times.

The Insurance Component

Life insurance in the child plan ensures that the monies payable to the child for higher education are protected against untimely death of the earning parent. I cannot overplay the importance of this insurance - in fact, my observation has been that most people underinsure their life in these policies.

By mandate, the minimum life cover that you have to opt for in a child plan is

Sum Assured = Term * Annual premium / 2

Thus, if you take an 18-year plan, paying Rs. 50,000 every year, the minimum life cover is Rs. 4.5 lakh. Now, if you have no other life insurance, a little bit of thinking would reveal to you that this life cover is woefully inadequate. After all, if you can afford to save Rs. 50,000 a year towards a single plan, it is likely that your annual income is at least Rs. 5 lakh. Thus, the insurance for the child does not even cover one year of income!

Instead, one would recommend a life cover of at least 7-10 times your annual take home pay, if not more. This provides adequate security and cover for your spouse and child to financially sustain in the event of your untimely demise. Read the rest of this entry »