Impact of Policyholder Bankruptcy on a Child Insurance Plan

Written by : Knowledge Centre Team

2025-12-07

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An insurance plan is generally considered to be an investment for tomorrow, especially when done for children. It is a commitment you make to ensure their education and financial security when needed. However, with rising inflation, financial hardships can affect anyone. Even responsible parents, especially those who run a business to support their families, may find themselves facing challenges like bankruptcy.

You might wonder about its legal standing or if the policy's benefits remain intact for your child. Today, we will break down what typically happens to a child plan when the policyholder faces bankruptcy. Let’s help you understand the position of your policy and the future funds designated for your child.

Key Takeaways

A child plan remains in force in case of bankruptcy if premiums are paid and can be safeguarded against creditors.
Transferring the child plan to a child or trust enhances protection against money claims.
A child plan calculator enables planning sensibly even in times of financial difficulties or insolvency.
Pursuing a child plan in bankruptcy ensures your child's education and aspirations.
Certain child plans provide loans, which may provide relief from financial stress during bankruptcy

What is the Purpose of a Child Insurance Plan?

A child insurance plan represents a commitment to your child's future. It ensures that their educational needs, personal interests, or even entrepreneurial dreams are financially supported. Whether it's a traditional plan with guaranteed returns or a unit-linked option offering potential market growth, the underlying objective is to secure and prepare for their future.

However, unexpected financial challenges, such as bankruptcy, may raise concerns about the plan's stability and long-term benefits.

What Does Going Bankrupt Mean?

Bankruptcy isn’t just a financially burdening situation, but a reality many individuals face due to unforeseen circumstances. It is a legal indication of a person who cannot repay their outstanding debts. In India, bankruptcy proceedings are governed by the Insolvency and Bankruptcy Code (IBC), 2016. It has a separate treatment for assets, including life insurance policies. However, the core concern here is whether a child plan is counted among the policyholder's assets or not.

What Typically Happens to a Child Insurance in Bankruptcy?

In case you have been declared bankrupt, there’s a certain procedure to be followed regarding the assets you hold. As for the child insurance plan, here’s what happens:

Insurance Policies as Legal Assets - Most insurance policies, including a child plan, are considered personal assets. However, there’s a twist. Many child insurance plans have a nominee or beneficiary (usually the child), which makes their treatment a bit different.
1. What Does the Law Say?
  Under Indian law, particularly Section 60 of the IBC, insurance policies may be considered part of the bankrupt’s estate. However, there are exceptions:
  - The policy cannot usually be liquidated if the child is listed as an irrevocable beneficiary.
  - Term plans without surrender value hold no financial value and may not be touched.
  - If the policy is under a trust for the child, it gains additional protection.
Surrender Value Matters - f your child insurance plan has a cash or surrender value, it might be viewed as an asset. The insolvency professional will evaluate this and may consider it for liquidation to settle debts unless specifically protected.

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The Reality Check

Policy Type	Has Surrender Value?	Impact During Bankruptcy
Child ULIP with the child as the nominee	Yes	May be evaluated, but often protected if irrevocable
Term insurance plan	No	No monetary value, generally not attached
Plan under a trust	Yes	Protected from liquidation
Endowment plan with surrender value	Yes	Can be considered an asset unless protected

How can you Safeguard a Child Plan from Financial Turbulence?

Being financially prepared is more than just investing wisely. You must know how to protect your investments. Here are a few ways you can shield your child plan from the impact of bankruptcy:

Assign the Plan Under a Trust: By placing the insurance plan under a trust for your child, the funds are legally segregated. This ensures that the money stays intact for your child's future.
Irrevocable Nomination: Make sure that your child is listed as an irrevocable nominee. This legally binds the policy to them and makes it more challenging for creditors to touch it.
Avoid Early Withdrawals: If your plan allows partial withdrawals or loans, avoid them during financial strain. These actions could reduce your policy’s immunity.

Role of Maturity Benefits in Child Planning

One of the highlights of a child plan is the maturity benefit. It is generally offered at key milestones in your child’s life. In case of your absence or financial setback, this benefit is a safety net. Most child insurance policies offer waiver of premium features, where future premiums are paid by the insurer if the policyholder faces death or permanent disability.

However, in bankruptcy cases, the maturity payout still generally belongs to the nominee (i.e., the child) unless court-ordered otherwise. Hence, safeguarding your policy at the time of purchase can make all the difference.

Did You Know?

Child plan payouts are tax-free for premiums under ₹2.5 lakh. Above that, they are taxed under Capital Gains as per the 2021 Finance Bill.

Source: ET Money

Why Calculators Matter in Child Insurance Planning?

Planning for your child’s future isn't a game of guesswork. Online child plan calculator offered by insurance providers can help you estimate how much coverage you need and what your premium would be. Using an insurance calculator for a child plan can guide you to:

Determine future expenses accurately
Choose the right policy duration
Ensure you’re not underinsured

Helping You Build a Shield for Your Child

Your love for your child goes beyond words. It reflects in your actions, and at Canara HSBC Life Insurance, we understand the emotional and financial commitment that comes with choosing a child insurance plan. Therefore, our plans are designed not just to offer returns, but to offer reassurance through the following ways:

Waiver of premium for continued protection
Flexible premium payment terms to suit your evolving financial situation
Access to calculators and personalised assistance for smarter planning

Even in times of financial difficulty, we work with you to ensure your child’s dreams stay uninterrupted.

Final Thoughts

Bankruptcy, while stressful, is not the end of the road. With the right financial decisions made today, your child’s tomorrow can still be bright and secure. A well-structured child plan can withstand uncertainties when chosen wisely, especially when complemented with legal protection and trusted insurance support.

Always read the fine print, understand the policy benefits, and consider using a reliable calculator to plan better. We believe in walking with you every step of the way, helping you protect not just your money, but your legacy of love.

Know the benefits of a Term Insurance Plan to secure your family's future.

Glossary

Child Plan: A life insurance policy that provides financial security for a child through savings and protection.
Bankruptcy: Legal status when one is unable to repay debts; it can impact financial assets.
Policyholder: The individual who holds the insurance policy and pays premiums.
Assignment: Passing on policy rights to another individual, commonly used to safeguard the child's plan from creditors.
Child Plan Calculator: A web-based calculator to calculate returns, premiums, and maturity value of a child plan.

FAQs

A child plan keeps running if premiums are paid; it is immune to creditors in most situations.

No, if the child plan is opted for the child or is taken under trust, creditors generally can't lay hands on its benefits.

Yes, a child plan is a long-term financial product that secures a child's future, even in the case of bankruptcy.

A child plan calculator assists in determining affordability and future value, which can be helpful in restructuring finances after bankruptcy.

Yes, continuing your child plan keeps your child's education and future goals secured despite any financial problems.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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Key Takeaways

What is the Purpose of a Child Insurance Plan?

What Does Going Bankrupt Mean?