What Are Child Plans?
Child plan or child insurance plans are any Guaranteed Returns Plans (endowment or money-back plans) or Unit Linked Insurance Plans that help you save a corpus for your child. The savings aspect makes sure that you build a corpus over the long term and get good returns. You can pre-define the stages when you would need these returns, for instance, when your child gets into high school or college or when they get married. The life insurance aspect ensures that your child’s finances are taken care of by the life cover, in case of your unfortunate demise.
Child-centric insurance plans are a financial tool that helps you plan a secure future for your child. It makes sure that financial insecurities do not come between your child and his dreams even when you’re not around.
What Is A Child Education Plan?
Child education plans are insurance-cum-investment plans (ULIPs) or guaranteed returns plans (money-back plans or endowment plans) that help to create a corpus for the child’s future, over a defined period. At the time of maturity, these plans pay out a lump sum to the child, which can be used to pay for education fees or marriage expenses.
How Does A Child Plan Work?
A child plan can be an Endowment Policy, a ULIP, or a money-back plan. In a money-back plan, the child gets a lump sum survival benefit at regular intervals. These plans are helpful for people who need a lump sum amount at a time in the future. However, these plans do not offer significant returns. Hence, they might not be able to offset the impact of inflation, especially if you need the money for education expenses.
Secondly, a ULIP plan is an investment and insurance plan, where a part of your premiums is used to provide a secure life cover and the remaining portion of the premiums is invested in different market securities. The investment made is as per your life stage, risk appetite and financial objectives. In case of the demise of the parent, the child gets a lump sum amount. Moreover, all future premiums of the policy will be waived.
Thirdly, an endowment policy is a plan where you receive a lump sum along with bonuses. These plans are useful as they help create a corpus for higher education expenses, etc. However, these policies are different from ULIP plans as they offer a guaranteed return.
How Child Plan Is Different From A Term Plan?
Child plans denote Savings plans or ULIP plans, whereas a term policy is a pure life insurance plan that guarantees a death benefit if the policyholder dies within the plan tenure. Post this, the plan ceases to exist. There is no maturity value offered by term plans in case the policyholder survives the term.
Alternatively, in insurance policies for children, the death benefit is paid upon the demise of the policyholder but the policy continues to exist. Moreover, the plan pays out a maturity benefit in case the policyholder survives the tenure.
Benefits Of A Child Insurance For Your Child’s Education
Getting a degree from the best educational institute requires a strong financial plan. An IIM Ahmedabad course fee has risen by 4 times in the last decade crossing the Rs 20-25 lakh mark. The tuition fee for an undergraduate engineering student at IIT today (in 2020) is Rs 2-3 lakh per annum. An MBBS degree from a private college which now costs about Rs 25-30 lakh. So, if you want your child to graduate from a premium institution then not only should be your child bright enough to qualify, but you need to be rich or save systematically to pay for the classes.
A child education plan is a combination of investment and insurance. It will help them focus on their career without worrying about finances even in your absence. The returns would be sufficient to help your child meet his future needs even when you are not around.
When it comes to your child’s education, it is a must to start saving as early as possible; to be financially prepared to support your Child’s dream. You could save up little by little every month, build up a fund over the long-term or you could start saving with a child insurance plan. You can choose to get returns at important stages of your Child’s life.
Why You Need A Child Insurance Plan?
Child insurance plans, i.e. ULIPs for children or savings plans for children, help you safeguard the future of your child. Given the rising education costs in the country, it is wiser to plan for your child’s education well in time. As per the “Household Social Consumption of Education in India” report, education expenses create a huge financial burden on households. This creates a situation where education beyond the secondary level nearly becomes unaffordable for most working-class people.
By investing in an insurance plan for your child, you secure your child against future uncertainties as well as build a corpus to fulfil expenses like sponsoring your kid’s education. In case of an unfortunate event leading to your demise during the tenure, the insurance plan will pay a lump sum death benefit to help your child cover the immediate needs as well as continue investing on the behalf of the insured. Moreover, the plan also waives all premiums in such cases.
Let us understand this through an example:
Getting a degree from the best educational institute requires a strong financial plan. An IIM Ahmedabad course fee has risen by 4 times in the last decade crossing the ₹20 lakhs mark. If it keeps on growing at the current rate of 20% per annum, it will easily cross ₹1 crore ten years later.
The tuition fee for an under-graduate engineering student at IIT today is ₹2 lakhs per annum. It is hundred times more than what it was thirty years ago, and is expected to touch ₹10 lakhs per annum figure in the next five years.
As per another 2018 report, an MBBS degree from a private college which now costs about ₹25-30 lakhs will go up to ₹50 lakhs over the next 10 years.
So, if you want your child to graduate from a premium institution then not only should be your child bright enough to qualify, but you need to be rich or save systematically to pay for the classes.
When it comes to your Child’s education, it is a must to start saving as early as possible; to be financially prepared to support your Child’s dream. You could save up little by little every month, build up a fund over the long-term or you could start saving with a ULIP or a Guaranteed Returns Plan for your child’s education planning. These plans not only give guaranteed returns on your savings but also offer you a life cover. You can choose to get returns at important stages of your Child’s life. And you can make sure that your child gets the benefits of the Child Insurance Plan even when you’re not around, with the life cover it offers.
So, yes. You do need a Child Education Plan.
Benefits of child insurance plans
The future of your child is your prime responsibility and also a big reason for your worries. You want to provide the best education for your child. But given the steeply rising cost of education in the country, you will need a substantial amount of savings to cover your child’s higher education expenses. Hence, regular investments in the right plan can help you build a large sum over time. That said, apart from creating a financial corpus for your child’s education, you also need to ensure they are financially secure in case of your absence.
With insurance plans tailored to provide specific benefits of your children, you get dual benefits. These plans combine financial protection for the child along with savings/wealth building that allows you to build a significant sum for the future.
Here are some benefits of child insurance plans:
- Covers immediate needs: Savings and insurance plans for children aim to support the regular needs of your child by offering money to help the family cover regular expenses like school fees, tuition costs, etc.
- Reliable asset for the future: An insurance plan that covers your child financially secures your child by offering a lump sum benefit in case of your demise during the plan tenure. Further, the policy continues to exist while all future premiums are waived off. The premiums are paid by the insurance company and the money remains invested till the end of the policy term. At maturity, the money is paid to the child, which can be used to cover the education costs.
- Disciplined investment for a child’s higher education: In a Guaranteed Returns Plan or ULIP, you invest regularly throughout the term of the plan as per your preferred premium frequency. If you choose a ULIP plan, you get a high return, owing to equity-linked market investments. As you approach maturity, you can change your investment into more secure ones like bonds.
- Tax benefits: Besides offering the above-mentioned benefits, these plans also provide significant tax benefits. The premiums are exempt from taxes up to Rs 1.5 lakhs under Section 80C of the Income Tax Act, 1961. The maturity sum and the death benefit are tax-exempt at the hands of the nominee as per Section 10(10D).
3 Reasons Why A Child Insurance Plan Is Essential
A savings and insurance plan for your child is the foundation of their future. Here are three reasons why these plans are essential:
- Sponsor the education and development of your child: Education is a basic and critical need for your child. When it comes to education, you should not make any compromise. The better education you provide your child, the more equipped they become for prospects. But given the soaring cost of education in India, it is useful to invest in a child insurance plan. These plans allow you to create a fund that can be used to pay for your child’s education, higher studies, extra-curricular activities, and more.
- Creating a corpus for the future: As a parent, you would want to sponsor the marriage of your child, either fully or partly. On such a joyous occasion, you would not wish to compromise on the wedding functions and ensure everything is adequately done. You do not wish to be in a situation where you are unable to fund the marriage expenses. Moreover, you might want to gift a car or a bike to your child in the future or help them set up a business or leave behind a legacy for their future. With an insurance plan moulded for your child’s protection, you can cover these objectives more optimally.
- Lead by example: As parents, you are the role model for your child. Your child learns from you and looks up to you to get a direction in life. The decisions you make as parents have a large influence on your kid. Hence, you must be financially disciplined and make prudent investments. A child insurance plan is one such investment that speaks of good judgement. When you set such examples for your children, you are helping them become smart individuals of tomorrow.
Tax Benefits³ With A Child Education Plan
Apart from the other benefits of a child education plan, tax benefits¹ are sure an added perk.
Tax Benefits³ on child plan premiums paid :
Premiums paid towards child plans are eligible for deduction under section 80C of the Income Tax Act, 1961. You can claim a deduction from your taxable income for this. This deduction is up to Rs.1.5 lakh a year.
Tax Benefits³ on income from child plan :
The amount received at maturity of the child education plan, will be completely tax free³ under section 10(10D)
If you have opted for a ULIP investment, the maturity payouts are tax-free if the total annual premiums paid are below ₹2.5 lakhs. If the annual premiums exceed ₹2.5 lakhs, then the maturity payouts will be taxed as Long Term Capital Gains.
Types of Child Insurance Plans
Endowment Plans for Children
In Endowment Plans, your funds are allocated into multiple debt products. While the returns on such an investment are not big, there is guaranteed security for your money due to low risk.
BENEFITS OF ENDOWMENT PLANS for children
- Less Risk : While savings for your child’s education, certain short-term investments may give better maturity benefits, however, a child endowment plan is comparatively less risky than them. While other investments are subject to market risks, a child endowment plan is subject to no such conditions. Hence, this is a much safer investment for a family.
- Tax Benefits³ : Along with saving for the future of your children, choosing a child endowment plan also lets you avail tax benefits³. While planning for your taxes, it is advisable to choose instruments that serve two purposes: not only would they help you save tax³ but would also provide the long-term benefits in terms of savings or protection, in line with your financial plans.
Guaranteed¹ Returns Plans
As the name suggests, a guaranteed¹ returns child plan gives you an assured amount back on completion of the maturity period. A guaranteed¹ return plan is a safe and assured way to save for your child’s future and does not involve high investment risks.
BENEFITS OF GUARANTEED RETURNS PLANS
- Flexible premiums : A guaranteed returns child plan makes provisions for flexible premiums. Based on your income and liquidity levels, choose the amount and mode of premium payments.
- Flexible time period: You can choose the maturity period of a guaranteed returns child plan based on your child’s age and the purpose for which are saving. This allows every parent to buy a plan which is most convenient for them and falls within their future plans, making it the child plan best suited for their need.
Market Linked Plans
A Market Linked Child Plan such as a ULIP (Unit Linked Insurance Plan) is a life insurance plan with an additional feature of investing your money in the market for future financial goals such as your child’s education. This means that you get the dual benefit of protecting your family as well as saving for their future.
BENEFITS OF MARKET LINKED CHILD PLANS
- Flexibility: ULIPs let you choose the premium amount, as per your requirements. They also give you the option of selecting funds as per your choice. Many ULIPs also offer the possibility of increasing your premiums during your premium paying term depending upon your family’s needs.
- Liquidity: No matter what your premium paying term or policy term is, after the lock-in period of 5 years, you can fully or partially withdraw funds from your account when you are in need of urgent funds.
- Tax Benefit³ u/s 80c: Premiums paid is deductible from taxable income under Section 80C. The interest earned and maturity amount ³ received is also exempt subject to conditions under Section 10(10D) of the Income Tax Act, 1961.
- Systematic Savings: ULIPs give you the benefit of putting aside a chunk of your income to save it for your child’s education and dreams in a systematic way.
- Wealth Accumulation: ULIPs not only let you save your earnings, but also help in growing wealth by allocating it to market-linked funds.
Life Insurance Plans
Apart from savings and investment plans, it is very important that every parent has an adequate life cover to protect their child’s future.
BENEFITS OF LIFE INSURANCE PLANS FOR CHILDREN
- Single Premium Child Insurance Plans: With single premium life insurance plans, you pay a lump sum annual premium instead of monthly or quarterly payments.
- Regular Premium Life Insurance Plans: Regular premium life insurance plans refer to investment cum life insurance plans that have a monthly or quarterly premium paying system.
How To Select The Right Child Insurance Plan?
Selecting the right insurance plan for your child’ protection is a critical investment for the future of your child. You can use these steps to find the ideal plan for your child:
- Identify your needs and goals, and the amount you require. You can do this by ascertaining the money required to sponsor the education or marriage of your child.
- Based on your needs, choose the policy term and the premium amount that will help you determine the optimum sum assured.
- Browse through various insurance plans such as ULIPs, endowment plans, savings plans, etc. Understand their pros and cons, and select one that best suits your needs.
- Compare the different plans and companies available in the market, and ultimately select make an informed decision as per features, flexibility, returns, tenure, tax benefits, liquidity, reliability, etc.