A child insurance plan is a combination of insurance along with an element of investment that aids in the financial planning for your child's future financial requirements, which include education. If a parent suddenly passes away, the insurance plan is to protect the child. Some Child insurance plans come with an in-built or an additional premium waiver benefit wherein if the parent dies within the policy tenure, the future premiums are waived by the insurer. The policy continues as per the schedule, and the child receives the survival or maturity benefit, as offered by the plan, at the designated tenure. So, this plan assures that neither you nor your child is short on funds for further education.
What Are the Various Types Of Child Insurance Plans?
Typically, insurance providers will offer child insurance plans as part of their portfolio, which will vary based on various characteristics, such as individual preferences and needs. Here are some options to think about:
1. Single Premium Plan:
You can pay the entire amount in a lump sum, i.e. as a single premium at the beginning of the plan, and the policy continues for the entire duration of the policy. The advantage is that your policy would not lapse as the premium is paid at the onset, and there is no requirement for subsequent payment.
2. Regular Premium Plan:
This plan is similar to any other policy in which the policyholder can pay the premium on an annual, semi-annual, quarterly or monthly basis. If you choose the regular premium insurance policy option, you will need to make recurring payments until the insurance policy matures. However, the premium payment will be considerably less.
3. Unit Linked Insurance Plans:
ULIP plans provide numerous benefits, such as insurance coverage, and participation in different market-linked funds. These advantages imply the child will receive the entire sum assured on their parent's death during the policy term, provided all due premiums are paid. There will be a waiver of future premiums if waiver of premium benefit is available under the policy, but you will get the maturity amount at maturity.
4. Traditional Child Endowment Plan:
An endowment life insurance policy provides children stability and savings. It aids in accumulating funds over time and receiving a lump sum payment at maturity along with life cover during the policy term, provided all due premiums are paid.
Benefits of A Child Insurance Plan
The benefits of a child insurance plan are as follows –
1. Secures your child’s financial future
A child insurance plan is designed to secure your child’s future in your absence. Parents may buy the plan to save up for their child’s future. Some child plans come with a waiver of premium benefit which waives the future premiums if the parent passes away during the policy term. The plan may continue uninterrupted as the insurance company pays the premium on the parent’s behalf under this benefit. On maturity, the maturity benefit is paid which may help the child meet the financial needs of higher education, marriage, etc.
Thus, child insurance plans can help secure the child’s financial future by providing a financial corpus whether the parent is alive or not.
2. Attractive returns
Endowment or money-back child plans usually offer additional returns in the form of bonuses (if any), guaranteed* additions or loyalty additions. This helps the corpus to grow so that the child gets the desired funds needed for higher education, marriage, etc.
If you choose a ULIP, you can get market-linked returns. Moreover, the added flexibility of switching, top-up, premium redirections and partial withdrawals may help you manage your investment and create a suitable corpus for your child.
3. Tax benefits
Child plans also help in saving tax. The premiums paid for the policy are allowed as a deduction under Section 80C of the Income Tax Act, 1961 up to Rs.1.5 lakhs subject to specified conditions2under old tax regime. The death benefit is tax-free3 while the maturity benefit is also tax exempt under Section 10(10D) subject to certain terms and conditions3 of the Act.
What Is the Purpose Of A Child Insurance Plan?
Every parent wishes to protect their child's future and offer them high quality education. The cost of education has often prevented talented children from furthering their studies. As a result, one may consider to invest in the child insurance plan. Here are some of the reasons:
● Immediate Financial Security:
In the event of a parent's death during the policy term, a child receives a lump sum payment that the child can use for educational purposes, provided all due premiums are paid. Some ULIP-based child plans offer the feature of premium waiver in the absence of the parent. This feature ensures that the corpus continues to build even after the death of a parent and help to create a secure corpus for a child’s financial future.
● Combat Education Inflation:
Over the last decade, university education tuition fees have been rising rapidly. The education inflation in India rose as high as 10% per annum1. Hence, you may consider having a suitable plan for your child’s education to avoid a significant dent in your funds.
● Return on Investment:
No parent wants to compromise their child's educational ambitions. Although the investment component helps you to build a substantial corpus, the strength of compounding requires you to operate for a longer-term.
How Much Should You Invest?
The common concern among parents is determining the appropriate amount to invest in their child's financial future. After all, no one knows how much education will cost when a child reaches that age. Many insurance companies provide information on, which plan is appropriate for you, the sum assured and premium amount. You can also utilise an online child education plan calculator to estimate how much money you should spend and invest.
How To Select The Suitable Child Insurance Plan For Your Kid?
Here’s how you can choose the suitable plan for your kid –
1. Opt for a suitable sum assured
The sum assured denotes the coverage amount offered under the plan. The sum assured should be sufficient enough to cover the financial needs of your child in your absence.
2. Pick a relevant tenure
Child insurance plans are available for different tenures. Choose a tenure after which your child would require the corpus for fulfilling their dreams. For instance, if your child is 5 years old today and you need a corpus when your child attains 20 years so that you can fund his/her higher education, a tenure of 15 years would be suitable. On the other hand, if you have a newborn child, you can pick a longer tenure to create a suitable corpus.
3. Choose the suitable plan
There are different types of child insurance plans available in the market – endowment plans, money-back plans and ULIPs, among others. Choose a suitable type of child insurance policy based on your financial needs, life goals and risk profile.
4. Assess the premium-paying tenure
Child insurance plans offer flexible premium-paying tenures – regular premiums, limited premiums and single premiums. Depending on your affordability and ease of payment, choose a suitable premium paying term so that you can pay the due premiums on time to enjoy the benefits of the plan.
5. Look for added benefits
Child insurance plans might offer additional benefits like guaranteed* additions, bonuses (if any), loyalty additions, fund boosters, etc. Look for these benefits as they provide additional privileges and protection.
6. Opt for riders
Optional riders might be available with child insurance plans, on payment of nominal additional premium, which allow you to customise and enhance the scope of coverage of the policy. Check the available riders and choose those which are relevant for all-around protection.
When Is the Right Time To Invest In A Child Plan?
You may want to invest in the child insurance plan as soon as possible, after you have a child. When you start early, you get two major benefits. One, you get a long-term investment horizon over which you can allow the returns to compound and grow into a sizeable corpus. Two, you can save affordably and still create a suitable corpus for your child’s future needs.
Moreover, starting early also gives you early insurance coverage, lower premiums and financial security.
Is Child Insurance Plan Tax-Free?
The child plan enjoys multiple tax benefits. Have a look –
- The premium paid for the policy is allowed as a tax deduction under Section 80C of the Income Tax Act, 1961 up to a limit of Rs.1.5 lakhs under old tax regime. You can claim the deduction subject to certain conditions2.
- The maturity benefit is tax-free under Section 10(10D) of the Act, provided some terms and conditions associated with the exemption are fulfilled3. Policy/Policies issued from 1 April 2023 with annual premium payable of more than Rs. 5 lakhs (excluding GST) will be taxable irrespective of Section 10(10D) conditions. There is no change in tax treatment for existing policies issued before April 1, 2023. For such polices, irrespective of premium amount, a policyholder is entitled to get all the erstwhile tax benefits, and maturity / surrender /Income benefit proceeds from them will remain tax-free provided the conditions under Section 10(10D) are satisfied.
As a parent, your child's future may be your priority, and no one wants to discourage their child from dreaming big. Numerous insurance firms can provide suitable child insurance plans that will fund their future educational needs and assist in the event of a parent's death during the tenure of the insurance policy. As there are several terms and conditions, gathering all the relevant information is critical before finalising any specific policy.
1. What is a child insurance plan?
A child insurance plan is a life insurance plan which helps in creating a corpus to secure the child’s financial future whether the parent is alive or not.
2. What are the types of insurance plans?
There are different types of insurance plans like term insurance plans, whole life insurance plans, child insurance plans, endowment plans, pension plans, money-back plans, ULIPs, among others.
3. When Is the Right Time to Invest In A Child Insurance Plan?
There is no right time to invest in a child insurance plan. The earlier you start, the better it may be. This helps you save over a longer term and earn compounded returns. Secondly, you can save in small amounts and still create a good corpus when you start early.
4. How to choose the suitable life insurance plan?
To choose the suitable life insurance plan, here are some tips –
- Choose a policy which matches your financial needs and goals
- Opt for an optimal sum assured which covers your family’s financial needs and goals in your absence
- Look for affordable premiums so that you can continue the coverage easily
- Look for a plan which offers a comprehensive scope of coverage and benefits
- Opt for the relevant riders for all-inclusive coverage
- Understand the claim process for faster claim settlements