How Does Child Insurance Plan Works
Updated On Jul 18, 2022
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While you are building the corpus to fulfil these goals for your child, an insurance plan provides a safety cushion to the corpus in case of your untimely demise. In the unfortunate event of your passing away before fulfilling the goal, the plan can invest the money on your behalf and give the maturity amount you originally aimed for your child.
Thus, child insurance plans are part of broader child-specific financial products, which also include child education plans. Child insurance plans are a mix of insurance and investment products, which ensure the financial security of your child’s future. These plans pay the life cover as a lump-sum amount at the end of the policy term. Child insurance plans are generally customisable with options to add a variety of riders that enhance the plan as per your child’s specific needs.
How does a Child Insurance Plan Work?
Child insurance plan helps you meet the following two objectives of your investment:
1. Future financial need for the higher education goal of your child
2. Need for the financial protection of this goal from your untimely death
Considering you are 30 years old at the time of starting your investment in a child insurance plan. Your child is three years of age and you want to accumulate Rs. 40 lakhs when she turns 18. You plan to invest Rs. 2 lakhs a year for the next 15 years to achieve this goal using a child insurance plan:
Figure: 15 Year Child Plan protects your child’s goal against your untimely demise
Under normal circumstances, the child plan will continue to invest your money as per your fund choices. Upon maturity, you may receive approximately Rs. 58 lakhs if your rate of return is 8% p.a. or Rs. 41 lakhs at a more conservative ROI of 4% p.a.
However, in the case of your early demise in the fifth policy years, your family will receive Rs. 20 lakhs as death benefit from the policy. After this pay out, they will not need to invest more in the plan. But the plan will continue receiving investments as if you are still there until maturity as you had originally planned. Upon maturity, the family will receive Rs. 41 to 58 lakhs as per the ROI achieved by the funds in the plan.
Benefits of Child Insurance Plan
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Guarantee of Support to Child’s Goal
Child plan will help you provide for your child’s important life goals regardless of your presence in his or her life. With life cover and goal protection options, child plan alone is enough to protect your child’s future whether through investment or life cover.
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Boost to the Growth of the Investment
Child education plans offer loyalty additions and other bonuses for long-term investors. The longer you stay invested the better your benefits become.
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Tax Benefits
Tax Benefits of child insurance plans are well known. You can reduce your taxable income by up to Rs. 1.5 lakhs every year if you invest in child plans. The maturity and partial withdrawals from the plans are also exempt from tax.
How Will a Child Plan Secure Your Child's Future?
Child plan offers a goal protection option along with the life cover and investment funds. Goal protection option ensures that the investment in your child’s goal continues even if you are no longer there.
Thus, the child insurance plan secures your child’s future in the following four ways:
1. Safe Investment Option: You can invest safely and achieve the goal regardless of market performance.
2. Loyalty Additions: Loyalty and other bonuses work to grow your money faster as you invest for a longer period.
3. Life Cover: Life cover will add to the financial support pool for your family immediately after your untimely death.
4. Goal Protection Option: Ensures that investment in the future of your child continues until the intended maturity.
Conclusion
Child plans are insurance cum investment plans that help an individual create a corpus for children's future, over a period of time (policy term). On maturity, these plans pay a lump sum amount which can be used to pay your child's college fees or marriage expenses.
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