For parents, one concern that often overrides all other concerns is that of their child’s future. For instance, as per one report, 51% of Indian parents want their children to have successful careers, while 49% ranked happiness in life as the important goal for their children1.
Fortunately, such goals may be achieved by ensuring that the child is financially secure with a life insurance policy aimed towards the protection of a child’s needs. Child insurance plans are a kind of life insurance plans that aim to provide financial support at various stages of a child’s life in achieving various milestones at different age. Despite the gradually increasing popularity of child insurance plans, there are still some persistent child insurance plan myths, which can lead to some people being hesitant to purchase them.
With an aim to raise awareness and reduce financial misinformation, we break down these misconceptions and aim to shed light on the truth.
Child insurance plans: Myths vs. the reality
Myth #1 - The life insured in a child policy is the child
Reality - Many people are reluctant to buy child plans because they believe that the life insured under such a plan is the child. And so, it is deemed unfavorable to buy a life insurance policy in the name of a child. However, this could not be far from the truth as the life insured under a child plan is the adult guardian of the child. In some cases, it is the parent and, sometimes, the grandparent.
The reason they are called child plans is that the primary focus is on the child’s education, future goals, health, and so on. You may also come across such variables when you are using the child education plan calculator when planning for your child’s financial future.
Myth #2 - A child plan ends when the primary policyholder passes away
Reality - Since child plans are ultimately life insurance plans, one of the common misconceptions attached to them is that they end once the policyholder passes away. This is not true, however, a child plan can continue to function until maturity and provide benefits to the child even after the passing away of the parent subject to the terms & conditions of the plan.
The aim of a child insurance plan is to ensure that the child’s financial needs are taken care of, and this is taken care of by the plan, whether the parent is around or not.
Myth #3 – For child insurance plans with an option of availing waiver of premium rider, premiums have to be paid even after the policyholder’s demise
Reality - Many think that a child plan will not be financially viable because the responsibility for the life insurance premiums falls on the remaining family members after the passing away of the policyholder.
Insurance companies understand this predicament and, therefore, offer riders at additional nominal premiums, under some child plans, that can take care of the premium aspect after the policyholder’s demise. For instance, the waiver of premium rider waives off all future life insurance premiums, under certain child plans, if the policyholder is diagnosed with a critical illness, undergoes a disability-inducing accident, or passes away.
With some child insurance plans, such features may be in-built, i.e., a part of the base coverage of the plan.
Myth #4 - Child insurance plans do not provide wealth accumulation or generation benefits
Reality – Such child plan myths are not true, since companies offer plans with different benefits based on your goals. If you are looking to generate long-term wealth along with providing financial protection for your child’s future, you can opt for a Unit-Linked Insurance Plan based Child Plan.
A ULIP offers the dual benefit of a life cover and market-linked returns. However, one must get an understanding of the risks involved in market-linked investment before investing.. You can also opt for a savings-oriented child plan, which offers the benefit of accumulating wealth via low-risk, fixed-income securities.
When the plan matures, the beneficiaries of the policy receive the accumulated fund value, subject to the conditions present in the policy.
Myth #5 - A child insurance plan does not provide liquidity benefits
Reality - A child insurance plan is designed to equip the parent (and the child) with financial security at various milestones in a child’s life. And so, there are opportunities to receive pay-outs at designated intervals for the child’s various goals, such as pursuing higher education abroad.
One can also make partial withdrawals on a ULIP based child plan after the lock-in period has ended subject to conditions stated in the policy. Thus, a child insurance plan in the form of a ULIP, can be said to have moderate liquidity depending on the terms and conditions of the plan.
Myth #6 - A child insurance plan can only be used to fund education
Reality – Parents usually buy child insurance plans with the motive of funding their children’s education, the benefits of the plan can be used for other purposes as well like child’s marriage when he/she reaches the age of marriage. The maturity benefit that the policyholder receives on outliving the policy term can be used to pay for different life goals focusing the child. However, since education costs tend to increase over time, parents opt for a child insurance plan with higher studies in mind. If that is your concern as well, then you can use a child education plan calculator to review the costs you may have to incur.
As seen from the above busted myths, a child insurance plan may help in having a certain amount of mental peace when it comes to your child’s financial future. To make sure you buy a plan that suits you and your child, get in touch with an insurance advisor or a financial expert.