Child insurance plan is an investment cum insurance plan from life insurance companies, which offers financial safety to your child’s dreams and goals. You can use a child insurance plan to invest in the big life goals of your child like higher education and marriage.
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.
Besides the lump-sum pay-out, child insurance plans from Canara HSBC Oriental Bank of Commerce Life Insurance also have periodic payments. These periodic payments coincide with the crucial milestones of your child’s life like education, marriage, etc.
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 child insurance plan from Canara HSBC Oriental Bank of Commerce Life Insurance. 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.
Is Child Education Plan Tax-Free?
The child education plan is a life insurance cum investment plan and provides the same tax-benefits as most life insurance plans. Following are the tax exemptions available with a child insurance or child education plans:
- Deduction of Invested Amount: Investment of up to Rs. 1.5 lakhs in child plans is deductible from your taxable income in a financial year.
- Partial Withdrawals: Partial withdrawals from the child insurance plans after the lock-in period is exempt from tax.
- Maturity Proceeds: Amount received from a child insurance plan at maturity is exempt from tax under section 10(10D) to the extent of the following:
- Your investment in any financial year has not exceeded 10% of the life cover in the policy.
- Your annual investment in Child ULIP plans purchased on or after 1st Feb 2021 does not exceed Rs. 2.5 Lakhs in a financial year
- Death Benefit: Death benefit your family would receive from the life insurance policy will be exempt from tax.
Benefits of Child Insurance Plan
- 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.
- Boost to the Growth of the Investment
Child education plans like Invest 4G from Canara HSBC Oriental Bank of Commerce Life Insurance, offer loyalty additions and other bonuses for long-term investors. The longer you stay invested the better your benefits become.
- 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.
Given the current scenario of higher education in India your child’s higher education can cost anywhere between Rs. 5 lakhs to Rs. 25 lakhs. Depending on the degree, course, college and duration of the course, you may end up spending even more than this amount.
Add to this the long-term inflation expectation of an emerging economy, 10 to 15 years later you may have to shell out anywhere between Rs. 20 lakhs to Rs. 50 lakhs for the same.
Considering all the time and a reasonable ROI, an investment of Rs. 1 to 2 lakhs per year would be enough to get you close to the goal.
When Is The Right Time To Invest In A Child Plan?
Any investment needs time to grow. The longer you can stay invested, the better your money would grow. Thus, the best time to start investing in your child’s education is with their birth.
Majority of the financial support your child will need is during her graduation and post-graduation studies. Meaning, you should have built a significant corpus by the time your child turns 18.
So, if you start at your child’s birth, you get the maximum time to grow your investments.
How To Select The Right Child Insurance Plan?
The best child education plan is the one which opens more doors for her in the future. Take note of the following factors with each step to select the most suitable child insurance plan for your child:
Step 1: Goal & Age
The first step is to figure out how much money should you keep aside for your child’s education. This could be tricky while your child is still growing their first teeth and saying their first words. However, preparing conservatively helps in the long run.
Also, if you have more than 15 years to invest in your child’s future, you can choose to invest more aggressively for better growth. Thus, your child’s current age will play a role.
Step 2: Investment Options
There are two major classes of child education plans – ULIPs and guaranteed plans. While guaranteed plans are safer, ULIP can give you more investment options.
If you want to invest aggressively for a longer period of time, ULIPs are better, as you can invest in equity funds and manage your portfolio automatically. Over a long period (usually more than 10 years) equity funds can add good value to your portfolio.
However, if you are hard-pressed for time, and want assurance of goal achievement Guaranteed Savings Plan would be a better choice.
Both plans will provide you with the goal protection option.
Step 3: Check the Pay Out Methods
Higher education cost is not a one-time expense, instead, you may need to commit an annual amount in fees and living costs. Thus, it’s better to check the mode of payment from the saving plan for your child.
ULIPs including Invest 4G Child Plan provides you with the options to withdraw money systematically in the final few years of investment or, in a lump sum.
Step 4: Check the Cost & Past Performance of ULIP Funds
Past performance of ULIP funds and associated costs will give you an idea about the returns you can expect out of the ULIP plan. Online child plans like Invest 4G offer very low investment expenses.
Step 5: Check the Claim Settlement & Other Ratios
The buying process of any life insurance plan cannot be complete without checking the claim settlement ratio, process and other financial ratios. While the claim settlement ratio gives you an idea about the robustness of the process with the insurer, others tell you about the financial strength.
A claim settlement ratio of above 95% is good in Indian life insurance landscape.
How Will a Child Plan Secure Your Child's Future?
Child plan offers 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.