Childrens Insurance Plan:Securing Your Childs Future

Children’s insurance plans are a combination of insurance as well as investment which helps in funding children’s future financial obligations

As of these days, formulating a proper financial plan has become one of the essential aspects of every individual’s life. Without an adequate financial plan it is very tough to survive in this world unless and until you are already a billionaire. In India, inflation has steadily been on the rise each year, thus reducing the purchasing power of your money. An individual has various life goals such as purchasing a car, house or financing children’s education, marriage or retirement. All these life goals can only be fulfilled if your finances are very well-planned. A financial plan includes insurance planning, investment planning and retirement planning.

Insurance planning is one of the critical portions of any financial plan as it protects an individual financially in case of occurrence of any unfortunate event. In most cases one cannot avoid an unfortunate incident but a person can prevent himself from financial burden by insuring himself against the same. In India, insurance companies offer various types of insurance plans on the basis of various individuals needs. One of the insurance plans offered by insurance companies is the children’s insurance plan. This insurance plan is available as a Unit-Linked Insurance Plan (ULIP) or Endowment Plan. 

Children’s insurance plans are a combination of insurance as well as investment which helps in funding children’s future financial obligations. In India, education cost has been rising year on year. School as well as college expenses are increasing over a period time which indicates that appropriate planning for a child’s education is very essential. Consequently, if you want your child to pursue the best educational course it is very essential to create a strong financial cushion. A children’s insurance plan helps parents to create adequate funds for their child or children’s education and marriage along with the benefit of insurance.

Features of Children’s Insurance

1 Sum Assured: Sum assured is paid in case of untimely death of the parent during the policy term. Commonly, sum assured is 10 times the regular annualised premiums.

2. Maturity Amount: Maturity amount is the amount you receive when a policy matures. This amount should be chosen by considering the future of the child as and when the amount is required. Interest rate and inflation rate should be taken into account before deciding on the amount of maturity in order to receive inflation-adjusted amount.

3. Policy Term: Policy term should be chosen according to the requirement of funds. If funds are required when a child attains the age of 18, the policy term should be chosen accordingly. For instance, if child is five years old, the policy term should be of 13 years. If funds are required for a child’s marriage at, say, 25 years then the policy term of the five-year-old child will be 20 years.

4. Premium Wavier Benefit: Premium wavier benefit is an integral part of the children’s insurance plan. In case of untimely demise of the parent during the policy term, the sum assured will be paid to the beneficiary and further remaining premiums will be paid by the insurance company. Moreover, the child is entitled to receive maturity amount at the maturity of the policy. Premium wavier benefit should be included in every child’s insurance plan in order to secure the child from any unwanted circumstances.

5. Partial Withdrawals: Partial withdrawal clause permits a policyholder to withdraw the amount before the maturity of the policy. A policyholder may face financial emergencies during the policy term. Therefore, this policy enables the policyholder to withdraw the amount during the policy term after the first five years.

6. Premiums: The premium amount depends on the sum assured and maturity benefit you opt for. Premiums can be paid on a regular basis such as monthly, quarterly, half-yearly and annually or one can choose to pay for a limited period of time.

7. Riders: Like any another life insurance policy, this policy also offer rider benefits. The riders are available in three basic categories – premium wavier benefit, critical illness benefit and personal accident death benefit. Premium wavier benefit is an in-built feature of children’s insurance plan and a policyholder can add another rider benefit to enhance its coverage.

8. Tax Benefits: The premium paid under the children’s insurance plan is eligible for tax deduction under Section 80C up to the limit of Rs1.5 lakhs. Moreover, any income from the plan is tax-free under Section 10 (10D). Tax benefits are as per the prevailing tax benefits of the Income Tax Act, 1961.

Case Study

Consider the case of Raju Jadhav (35) who has a child three years of age. He is concerned about his child’s education since the cost of education is rising. Jadhav wants a definite amount of funds for the higher education of his child when he attains the age of 18. He has therefore been pondering over whether to invest in a mutual fund SIP or in Child ULIP. If he decides to purchase Child ULIP from AEGON Life Rising Star with a premium amount of Rs20,000 per year along with sum assured of Rs2,00,000 for the term of 15 years, given that the child is now three years old and funds are required at the age of 18, he decides to invest in a stable fund which offers 8 per cent rate of interest subject to various charges such as premium allocation charges, mortality charges, fund management charges and administration charges which might vary company to company.

His maturity amount at the end of the 15th year will be Rs4,94,680 with IRR of 6.03 per cent. Conversely, if Jadhav invests Rs20,000 every year in a hybrid mutual fund SIP which offers return of 10 per cent every year, the amount he will receive will be Rs6,99,000 at the end of the 15th year subject to expense ratio which varies fund to fund and is levied every year. Therefore, mutual fund SIP offers higher amount as compared to Child ULIP but children’s insurance policy offers various benefits such as premium wavier benefit in case of death of the parent along with lumpsum amount of sum assured at the time of death and maturity benefit.

This insurance policy offers tax benefits under Section 80C as well as under Section 10 (10D). Mutual funds do not offer any tax benefit under these two sections. If you have invested in a mutual fund SIP your investment will stop in case of a parent’s death whereas in case of children’s insurance plan the remaining premiums for the policy will be paid by the insurance company. For instance, if unfortunately Jadhav dies in the 10th year of the policy term, his family will not have to worry about the education expenses of the child if he had purchased children’s insurance policy.The policy would be in force till maturity and all the regular premiums due after the death of the life assured are waived.

An amount equal to the annualised premium will be paid to the beneficiary at the start of every policy year following the date of death till the end of the policy term (income benefit). At the end of the policy term, the base fund value will be paid to the beneficiary. However, in the case of a mutual fund, the SIP investment will stop and one can only withdraw the amount accumulated i.e. the amount accumulated at the end of the 10th year will be Rs3,50,620. And in case of insurance, the beneficiary will receive Rs2,00,000 as sum assured at the time of death along with Rs20,000 for the remaining five years from the date of Jadhav’s death and also receive the base fund value at the end of the policy term.

Conclusion

If you want to secure as well as create a fund for your child’s education or marriage, it would be advisable to invest in children’s insurance policy as it offers various benefits. The above example is just for illustration purposes. Before investing in any insurance plan one should go through the terms and conditions provided by the insurance companies. This insurance policy comes with tax benefits which is one of the added advantages of such policies. If anyone wants to invest in a mutual fund, it should be backed by a proper financial plan in place while also considering the fact that unexpected circumstances may occur. The investment should be allotted accordingly and must not hamper your child’s future.