Does My Child Need Life Insurance?

It is essential to understand the fundamental difference between Insurance and Investment before we learn whether a child needs insurance or not. 

The family's bread earner generally takes insurance to provide financial security to their family in case of sudden death/unforeseen event. Investment through insurance is to pay a premium towards the policy consistently and wait for the maturity benefits as a lump sum payment from the insurance company with other benefits like tax deduction and high return.

Should you get Insurance for your child?

Yes! It is logical to get child insurance, not for financial security to the nominees, but for the very purpose of investment and securing the child's future protection.

There are specific logical reasons to purchase life insurance for a child. However, some of the biggest reasons that child insurance is beneficial for their future needs are:

1. Guarantees child future protection and insurability:

The possibility of a child developing a health condition that could be genetic would need coverage when he grows up. After a certain age, many illnesses become uninsurable, so to cover this risk, you, as parents, must get children insured from the very beginning.

2. COVID -19

You must consider the long-term and unknown effects of COVID-19, which can potentially be present in children who contracted the virus.

3. Investment Vehicle for Children:

There are thresholds in a child’s life that require huge finances like admitting your children to school, preparing them for secondary school, buying them a new house, marriage purposes, paying for their higher education, or sending them abroad for international exposure. You can withdraw money, borrow from the policy, or be eligible for a lump sum amount as maturity benefits for such purposes.

4. Preparing for the worst

God forbid if there is a contingency of losing a child, which is extremely painful and comes with unexpected costs, your child's education insurance can pay out a lump sum in the event of a death.

5. Income Protection for the Child

In a situation wherein the breadwinner of the family is no more or isn’t around to pay the policy's premiums anymore, the child gets the benefit of regular income to children, which is equal to 1% of the sum assured.

6. Collateral Security for Loans for Higher Education

Higher education is expensive, and a child insurance plan is beneficial as it can be kept as collateral to secure loans from banks at lower rates of interest to fulfill the higher educational needs of children.

7. Partial Withdrawal:

There could be a situation wherein the child would need emergency funds for fulfilling his dream – it could be talent-based training, an extended vacation, etc. Instead of using the entire policy fund, your children benefit from withdrawing some amount from the policy after a certain number of years to fulfill the need.

Different types of Child Plans:

1. Single-Premium Child Plan

The policyholder pays a one-time payment securing his child's future and saves himself from the trouble of paying regular premiums. In addition, interest is earned on this policy, and a higher amount is paid on maturity to the children.

2. Regular Premium Child Insurance

This incorporates flexibility in paying premiums that can be paid monthly/quarterly/half-yearly/or yearly.

3. Child ULIP (Unit-Linked Insurance Plan)

The Child ULIP plan benefits higher insurance coverage, disciplined investments, and contribution to the equity market. Under this policy, the child is entitled to the sum assured on the death of his parent/guardian, who is the premium-payer of that policy. In such a scenario, future payments are waived off, and the maturity amount is paid when the policy matures.

4. Traditional Child Endowment Plan

This plan provides the dual benefit of savings and security wherein the parent's premium paid towards the policy is invested in debt instruments, and the bonus is payable at maturity. This is unlike the term insurance plan, which isn’t suitable for children as it is pure insurance offering financial coverage to the policyholder's nominee, which is generally taken by the bread-earner of the family – not children.

Features of a Child Insurance Plan:

1. Options to Choose Riders

Most child insurance plans offer additional riders, one of which is the waiver of premium. This enables the premium to be paid during the policy tenure to be completed waived off if the premium-payer policyholder is no more. The child gets the maturity benefits in full or installments as per their situation. Other riders can also be added- on to the base policy like:

• Accidental Death and Disability Benefit that pays an extra sum assured in the event of an unfortunate mishap that can cause death or disability.
• Critical Illness Rider Benefit –Critical Illness rider benefit offers coverage for a predetermined set of critical diseases.

2. Sum Assured

The sum assured is more than 10 times the gross income of the policyholder in a child's education plan that is paid out in the event of the unfortunate demise of the parent.

3. Tax Benefits

All child plans come under the E-E-E category of tax exemption under the Income Tax Act, 1961, which the considered the highest grade of tax benefit accorded by the Indian Tax Laws.

4. Immediate Financial Protection

In the case of the policyholder's death, an immediate amount is given out to the child so that their education and daily expenses are not affected in any way.

5. Maturity Amount

You should choose the maturity amount considering the child's future protection planning. You can also seek a professional’s help on the same and remember to consider the inflation rate, interest rates, and other factors. It is imperative to read the policy's fine print very carefully before purchasing a child insurance plan.

6. Policy Term

You can decide the policy term depending on your child’s current age and the age you want the policy to mature (normally 18/21 years). So if your child is 8 today and you want the policy to mature when he is 18, the policy term should ideally be 10 years.

7. Premium Amount

The premium amount depends on the income and saving capacity of the parents and can be paid in annual, semi-annually, quarterly, and monthly modes.

8. Funds’ Choice

A child ULIP plan enables you to choose the type of fund, whether it is debt, hybrid, or equity, to invest in. You can invest in Dynamic Fund Allocation and Systematic Transfer Plan also.

9. Loan Benefit

You can use the child policy as collateral and apply for secured loans against the policy.

Conclusion

A child plan is a comprehensive plan that offers your child financial stability, protection, and support to fulfill his dreams. To take full advantage of all the benefits of a child plan, you must invest early and allow your money to grow with the power of compounding. Just keep a stringent check on your budget, investment needs, and own coverage needs before you invest in a lucrative child education insurance plan.