Inflation and Child Insurance Plans: What Must You Do?

What is Inflation and Why Does it Matter?
 

Inflation is the rate at which the prices of goods and services rise over time, lowering the purchasing  buying power of money^[2]. India’s inflation rate has varied between 4% and 6% in the recent years^[1]. This steady rise can have an impact on long-term financial planning, especially for goals like education and healthcare.
 

Understanding Child Insurance Plans
 

Child insurance plans are financial investments type of life child insurance plansT that assist parents to save and invest for their children's future. These plans typically include a combination of insurance and investment components, ensuring that funds are available for significant milestones like higher education or marriage^[3]. For instance you could opt for SIPs, if you have a girl child then SSY (Sukanya Samruddhi Yojana), ULIPs or Mutual Funds. After a thorough research you will be able to udnderstand how much money you can shell out each month and invest accordingly.
 

Features of Child Insurance Plans
 

Life Cover:
 

Provides financial protection for the child. The extent of coverage is proportionate to the premium you payin case of the policyholder’s demise^[3].

Savings and Growth:
 

Helps build a corpus over time through investments in equity, debt, or hybrid funds.

Flexible Payouts:
 

Allows partial withdrawals at key milestones subject to policy terms & conditions. Do note that partial withdrawals are only applicable in case of ULIPs.

Tax Benefits:
 

Offers tax exemptions under Section 80C (in case of old tax regime) and Section 10(10D) of the Income Tax Act (subject to certain conditions).^[4].
 

How Inflation Impacts Child  Insurance Plans

1. Erosion of Purchasing Power

 inflation. Even if you accumulate a large corpus, inflation reduces its real valueOne of the factors that may make The only thing making your investments and financial planning ineffective is inflation. As inflation depreciates the value of your money^[5]. A sum assured of ₹20 lakh today may only cover expenses worth ₹10–12 lakh in the future due to the declining value of money.

2. Rising Education Costs
 

India's education inflation rate rose by 1% in May 2021, to 4.09% (provisional)  in 2022.⁵ This shows how necessary it is for you as a parent to secure funds for your child's higher education. You need to ensure that the corpus you build is enough to meet your child's educational expense keeping the inflation rate in mind^[5].
 

3. Healthcare Costs

Healthcare costs are heavily impacted by inflation too. In India, healthcare expenses are rising at the rate of 14%, in case of illnesses, your savings could take a big hit ^[5].
 

Steps to Protect Your Child’s Future Against Inflation

Start Early

The earlier you begin, the more time you have to grow your money giving you chances to take bigger risks and earn more money in the long run. If parents start earning and saving for their children early, they’ll be better prepared to handle future expenses^[46].
 

Prioritize Financial Goals

Plan and prioritize your child’s goals and ensure each one of them is covered separately to increase the likelihood of achieving them. Parents may cConsider separate term plans for vital goals^[46].
 

Select a Premium Waiver Plan

Choose a child insurance plan that includes a premium waiver in case of unforeseen circumstances, ensuring your child’s education continues without financial strain^[4].
 

Include Partial Withdrawal Plans

Prepare for emergencies by including partial withdrawal options in your child’s education fund, providing easy access to money when needed urgently^[6].
 

How to Select the Right Child Insurance Plan

1. Check Past Performance

If you are investing in SIPs or ULIPs try to track past performance. While past performance doesn’t guarantee future results, it does indicates how the plan has performed during inflationary periods.
 

2. Look for Flexibility

Choose plans that offer flexible payout options or allow partial withdrawals. This ensures you can access funds when needed without compromising the overall goal.
 

3. Evaluate Additional Benefits

Riders like critical illness coverage, waiver of premium, or accidental death benefits can add extra layers of security to your plan.
 

4. Account for Inflation in Sum Assured

Opt for plans that offer increasing sum assured or inflation-adjusted payouts to ensure the corpus keeps pace with rising costs over time.
 

Conclusion

Inflation is an unavoidable reality, but its impact on child plans can be mitigated through informed planning and strategic investments. Start early, choose a plan with inflation-beating potential, and review your progress periodically. By doing so, you can ensure your child’s future is financially secure and unaffected by rising costs.

Inflation impacts child plans, but starting early, choosing plans with inflation-beating potential, and periodic reviews can effectively secure your child’s future, ensuring rising costs don’t compromise their financial security.
 

Frequently Asked Questions (FAQs)

1. What is the impact of inflation on child plans?
 

Inflation reduces money's purchasing power, so without properly accounting for it, a child plan's corpus may fall short of future expenses, especially with rising education and healthcare costs over time.
 

2. How can I ensure my child's plan keeps up with inflation?

To ensure your child plan keeps up with inflation, you can:

• Go for plans that would offer the potential for give you good returns, you can opt for plans that come with higher returns such as ULIPs but don't forget the returns are based on market performance.Opt for plans with equity or hybrid fund investments for higher returns.
• Periodically increase the sum assured.
• Regularly examine and adjust your plan to align with inflation trends.
   

3. Are child plans a good way to save for my child’s education?

Yes, child plans are effective as they combine insurance with investment, ensuring financial security and wealth accumulation.