How Child Insurance Plans Work – Forbes Advisor INDIA

Nothing can beat the joy of welcoming a baby into your family. There is much anticipation, and even more celebration. A baby changes your world! As parents, your dreams become bigger. An education that supports a high-flying career, a lavish wedding, the child’s future needs come to fore. In the excitement, one tends to overlook their other responsibilities such as buying a house, taking care of aging parents, planning for medical contingencies and their own retirement corpus, and so on.

You want the best for your children, that’s natural! But securing these certainties of life shouldn’t come at the cost of compromising your own future financial security and lifestyle comforts.

Children Are An Investment

Having a child is both a delight and an investment. The planning begins from the pregnancy stage and so do the expenses. But you can still safely plan for your child’s future needs without having to worry.

Child insurance plans give you the financial discipline to secure your children’s financial future. A savings plan, it offers the dual benefit of investment and insurance. The insurance component ensures that the investment corpus is built, by the policy holder or the insurance company. In a child insurance plan, the parent is the policy owner while the child is the beneficiary.

Benefits Children As Well As Parents

A parent’s biggest priority is their child’s financial security. A child insurance plan is the best risk management investment tool that addresses your concerns.

  • How can I give my child a guaranteed source of income? Once you purchase a plan, it pays your child for life. If a plan commits to paying you X amount of return for Y number of years, it is obliged to do so and will not be recalled or changed. So, whether you choose a regular income option, say, from the age of 18, or a lump sum at a later age, your child is always financially covered. The returns can be structured as per your requirements.
  • How long should I take the plan for? The longer you stay invested in the child insurance plan, the better the returns. You can build a corpus that is accessible to you at specific milestones – education, marriage, or business.
  • What happens if I pass away before the plan matures? Most child plans have a ‘waiver of premium’ (WOP) feature. This gives your child a double benefit. Firstly, if the policyholder dies prematurely, the insurer immediately pays the sum assured to the nominee. Secondly, the policy is not terminated; all future premiums are waived, and the insurance company pays the premiums for the policy on behalf of the policyholder and pays the child at the time of policy maturity. So, your child is completely covered and has a stream of income, regardless of whether you are there or not.
  • What if I can’t afford the premiums? Don’t worry, child plans offer flexible premium paying terms, which means the premiums can be paid in installments. You can also choose a sum assured as per your affordability and buy an additional policy if you want to increase the coverage later, when it is feasible.
  • Is a child plan taken only to cover expenses of education, marriage, etc.? Child plans can be used to fulfill multiple requirements. They can be used for systematic transfer of money or wealth transfer. Child plans can be used as an inheritance planning tool, or to create a regular source of income for children who are unemployed (eg, a daughter who is a housewife) or are differently abled.
  • Can only parents make a child plan? Anyone can take a child plan, eg, a grandfather can take it to protect his grandchild’s future.

It is to note child insurance plans are not just structured to protect the child’s financial interests. They also offer financial flexibility and peace of mind to parents.

Child Plans Vs Other Investments

Child plans think like parents do. They protect the interest of the child, no matter what. Now your obvious question will be – “How does a child plan differ from traditional investment options, such as stocks, mutual funds, gold or even real estate?” What makes child plans unique is that once the insurance company makes a promise, it is fulfilled without any compromise. Child plans offer a guarantee, which secures your child’s financial future.

In comparison, traditional investments have the following challenges:

  • To build a corpus for your children’s future using these instruments, you would have to be alive to keep investing. If the investor passes away, the funding may be discontinued, and the child’s goal may never be achieved.
  • You need the market knowledge and time to monitor the investments, and you may not have the resources for both.
  • Returns are market-linked so there are no guarantees of returns, which means you could lose your savings.

Most people do not regard child insurance plans as a considerable investment choice. You have just read about the benefits child insurance plans offer. These three scenarios will give you a better perspective.

Scenario 1: Ramesh and Surbhi are in their late 40s and have a 15-year-old son, Suraj. Ramesh works as a senior manager in a private firm while Surbhi is a housewife. Ramesh has invested in mutual funds to finance Suraj’s dream of becoming an Aerospace Engineer. He also has a term insurance plan with Surbhi as the beneficiary. The couple recently took a home loan to buy a bigger house to accommodate Ramesh’s aging parents. Sadly, Ramesh suddenly passes away and Surabhi is thrust with the responsibility of paying the EMIs, in-laws’ medicals, and other living expenses. Due to the sudden loss of income and no pension, she is forced to liquidate the investments set aside for Suraj’s education. She utilizes the death benefit received from the policy to clear the home loan. Suraj takes up a part time job to support the family and forgoes his dream.

How a child plan would help: If Surabhi had invested in a child plan, it would have paid for Suraj’s education. She would not have had to liquidate the investments and could have run the house on its dividends.

Scenario 2: Ketan and Aruna have just retired from their government jobs and are looking forward to their sunset years. Their provident fund corpus together with their pension, is sufficient to cover their needs. When their only son quits his job and needs money to set up his own business, they give him the entire corpus as they do not want him to pay the heavy interest on a business loan. The business fails and their son is now not only without a source of income, but also has debts to clear. Ketan has no option but to mortgage their house to provide for Aruna and his son’s family.

How a child plan would help: If Ketan had taken a child plan when his son was a toddler, it would have built a considerable corpus. His son could have used this for his business and even if it had failed, it would not have compromised his parents’ retirement security.

Scenario 3: Monica, 35 is a recently divorced working mom. She now has to find a new apartment and pay rent. She will also require furniture, electrical appliances as well as a maid to take care of her two daughters. With child support that barely covers her two daughters’ school education, how will she provide for her children’s future on a salary of INR 60,000 per annum?

How a child plan would help: Monica should invest a part of her salary in a child plan so that her daughters’ higher education is not compromised.

These situations are not unfamiliar but just go to show how an unexpected turn of events can derail even the best laid plans for your children. Child plans offer complete safety for the benefits they offer.

Tips To Choose A Child Plan

There are many child insurance plans on offer but the key to choosing the right one lies in first identifying your objectives. Here are two important questions you must ask yourself:

  • What are the goals I am saving for? – Is it for your child’s higher education, marriage, or simply to make them financially independent? Does your child have a medical condition, which may require expensive treatment in the future?
  • What are the risks I am protecting my child from? – Are you worried about the breadwinner’s premature death? Is there a family litigation, which could affect your financial fortunes? Are there any loans or other liabilities? Will you be burdened with the responsibility of aging parents?

Once you have the answers, it will help you select the plan that will ensure the best future outcomes for your child. Here are a few things to consider:

In fact, you should ideally buy it as soon as your child is born. This will help you build a better corpus as you will be invested for a longer period. For example, you want a lump sum when your daughter turns 18. If you buy the plan when she is 10-years old, it will give you only 8 years of compounded interest. But if you buy it when she is 2-years old, you will get 16 years of compounded interest.

Economic vagaries and inflation can impact your financial planning. The sum assured you sign up for needs to be worthwhile a decade or two later. What sounds like a significant amount today may not even be enough to pay for crucial needs at that time.

  • Due diligence is important

Do your due diligence by researching child insurance plan benefits and comb through the policy terms and conditions minutely before you sign up.

For example, be sure to use the waiver of premium option in case of the breadwinner’s premature death. This will ensure that the policy is still valid and the insurer continues to pay the premiums, which is a saving for you.

Other benefits you can check for is whether the plan offers you a loan against policy, tax benefits on premiums paid, and if the plan allows a partial withdrawal to meet unexpected requirements for the child.

Bottom Line

Children are a precious proposition that requires resources for life. The children of today are different from when you were a child and hence, their needs are different. People should consider child insurance plans as crucial as any other investments. It is extremely important and requires the same commitment and financial discipline as, say, paying equated monthly installments (EMIs) for a house or car. Raising a child should be a prudent decision, not just an emotional one.

As a parent, you have a responsibility to ensure that your child’s future goes as per the plan. The comprehensiveness of life insurance plans – protection, guaranteed and structured returns – makes them the best solution.

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