A child insurance plan is an investment-cum-insurance plan from life insurance companies, which provides financial security for your child’s dreams and goals. You can use a child insurance plan to invest in your child’s major life goals like higher education and marriage.
While you are building a corpus for your child to fulfill these goals, the insurance plan provides a safety cushion to the corpus in case of your untimely demise. In the unfortunate event of your passing away before meeting the goal, the plan can invest the money on your behalf and give the maturity amount that you originally targeted for your child.
Thus, child insurance plans are part of a wider range of child-specific financial products, which also include child education plans. Child insurance plans are a combination of insurance and investment products, which ensure financial security for your child’s future. These schemes pay the life cover as a lump sum at the end of the policy term.
Apart from lump-sum pay-outs, Canara HSBC Life Insurance’s child insurance plans also have periodic payouts. These periodic payments coincide with critical milestones in your child’s life such as education, marriage, etc.
Child insurance plans are usually customizable with options to add various riders that enhance the plan according to your child’s specific needs.
How does a child insurance plan work?
A child insurance plan helps you fulfill the following two objectives of your investment:
1. Future financial need for your child’s higher education goal
2. This goal requires financial security against your untimely death
Consider that you are 30 years of age when starting your investment in a child insurance plan from Canara HSBC Life Insurance. Your child is three years old and you want to collect Rs. 40 lakhs when she turns 18.
You plan to invest Rs. 2 lakh per year for the next 15 years to achieve this goal using the Child Insurance Scheme:
Under normal circumstances, the child plan will continue to invest your money according to your fund preferences. At maturity, you will get 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 case of your early death in the fifth policy years, your family will get Rs. 20 lakhs as death benefit from the policy. After making these payments, they will not need to invest more in the scheme.
But the plan will continue to receive investment as if you were there till maturity, as you had originally planned. On maturity, the family gets Rs. 41 to 58 lakhs as per the ROI achieved by the funds in the scheme.
Is Child Education Scheme Tax Free?
A child education plan is a life insurance cum investment plan and offers tax-advantages similar to most life insurance plans. Following are the tax exemptions available with child insurance or child education plans:
- Deduction of invested amount: Rs. Investment up to 1.5 lakh in a child plan is deductible from your taxable income in a financial year.
- Partial withdrawals: Partial withdrawals from child insurance plans after the lock-in period are exempt from tax.
- Maturity Proceedings: The amount received from a child insurance plan on maturity is exempt from tax under section 10(10D) to the following extent: 1.Your investment does not exceed 10% of the life cover of the policy in any financial year. 2. Your annual investment in a child ULIP plan purchased on or after 1st February 2021 does not exceed Rs. 2.5 lakhs in the financial year
- Death Benefit: The death benefit your family receives from a life insurance policy will be exempt from tax.
Benefits of Child Insurance Scheme
- A guarantee of support for the child’s goals
A child plan will help you meet your child’s important life goals regardless of your presence in their life. With life cover and goal protection options, a child plan alone is enough to secure your child’s future, whether through investment or life cover.
- Encourage investment growth
Canara offers child education schemes like Invest 4G from HSBC Life Insurance, Loyalty Addition for long-term investors and other bonuses. The longer you invest, the better your benefits will be.
- Tax benefits
The tax benefits of child insurance plans are well known. If you exceed your taxable income of Rs. can reduce up to 1.5 lakh per year if you invest in child plan. Maturity and partial withdrawals from the schemes are also tax free.
Given the current state of higher education in India, your child’s higher education costs Rs. 5 lakh to Rs. 25 lakhs. Depending on the degree, course, college and duration of the course, you may spend more than this amount.
Add to this the long-term inflationary expectations of an emerging economy, after 10 to 15 years you need Rs. 20 lakh to Rs. 50 lakhs for it.
Considering all time and reasonable ROI, an investment of Rs. 1 to 2 lakhs per year will be enough to get you closer to the goal.
When is the right time to invest in a child plan?
investment needs time to grow. The longer you invest, the better your money will grow. Thus, the best time to start investing in your child’s education is right after their birth.
Your child will need most of the financial support during his graduation and post-graduation studies. Meaning, you should build a substantial corpus by the time your child turns 18.
So, if you start with the birth of your child, you get maximum time to grow your investments.
How to choose the right child insurance plan?
The best child education plan is one that opens more doors for him in the future. Consider the following factors with each step to choose the best child insurance plan for your child:
Step 1: Goal and Age
The first step is to decide how much money you should set aside for your child’s education. This can be difficult when your baby is still growing their first teeth and speaking 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 may 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 main categories of child education plans – ULIPs and guaranteed plans. Although guaranteed plans are safer, ULIPs can give you more investment options.
If you want to invest aggressively for the long term, ULIPs are better, as you can invest in equity funds and manage your portfolio automatically. Over the long term (usually more than 10 years) equity funds can add good value to your portfolio.
However, if you are tight for time and want the assurance of goal achievement, a guaranteed savings plan would be a better choice.
Both the plans will offer you a goal protection option.
Step 3: Check payment methods
Higher education expenses are not a one-time expense, instead, you may need to send an annual amount towards fees and living expenses. Thus, it is better to check the payment method from savings plan for your child.
ULIPs, including the Invest 4G Child Plan, offer you the option of systematic withdrawals over the last few years of the investment or even in one lump sum.
Step 4: Check the price and past performance of ULIP funds
The past performance of ULIP funds and associated costs will give you an idea of the returns you can expect from a ULIP plan. Online child plans like Invest 4G offer very low investment costs.
Step 5: Check claim settlement and other ratios
The process of buying any life insurance plan cannot be completed without checking the claim settlement ratio, process and other financial ratios. While the claim settlement ratio gives you an idea about the strength of the process with the insurance company, others tell you about the financial strength.
A claim settlement ratio of over 95% is good in the Indian life insurance landscape.
How will a child plan protect your child’s future?
Child plans offer goal protection options with life cover and investment funds. The goal protection option ensures that your child’s goal investment continues even when you are not there.
Thus, a child insurance plan protects your child’s future in the following four ways:
1. Safe investment option: You can invest safely and achieve the target regardless of the market performance.
2. Loyalty Additions: Loyalty and other bonuses work to grow your money faster as you invest for longer periods of time.
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 investment in your child’s future continues till desired maturity.