What is a Child Insurance Plan? 4 Things You Should Know

The child plans are a mixture of investment and insurance which ensure your child’s financial security in his/her future. These plans work in the way towards fulfilling a child's life goals and let you extend its benefits by adding riders along with it.

What is a Child Insurance Plan?

Prime objectives of child insurance plans are to provide financial help for your child’s future and protect the corpus even after the unfortunate event. It is an endowment policy plan that extends its benefit to your child’s future. 

Child insurance policies work like any other insurance plan. You purchase a policy and then you continue to invest in it until the term period. If the policyholder passes away during the term limit insurer will pay a death benefit to the beneficiary and the policy will cease to exist. 

With child insurance policies, the policy does not cease to exist with the policyholder’s death. It keeps on investing until the term period so that your plans for your child's future will not be interrupted. 

What are the Types of Child Insurance Plans?

Child insurance plans help parents accumulate money for their child's future by investing in different funds on their behalf. There are three types of child insurance plans as follows: 

• Traditional Endowment Plan: The traditional investment plan extends insurance for a child's future by providing various bonuses. These bonuses are added to the sum assured of the term insurance at the end of the term of the policy. You can opt for a way to receive a bonus.

• Child Unit Linked Insurance Plans: Child’s Unit linked insurance plans or ULIP provide triangulated advantages. These plans include insurance cover, investment in the equity market, and disciplined investment. 

  This ensures that the nominee of the policy will receive the death benefit after the death of the policyholder and the maturity corpus will come after the maturity period. After the death of the insured parent future premiums are usually waived off. 

  Some insurers allow policyholders to choose between their preferred investment funds. Some dynamic ULIP insurance plans invest in both equity as well as debt instruments. 

4 Things You Should Know About a Child Insurance Plan

Purchasing a child insurance plan can be confusing. Knowing insurance plans in advance will help you choose a better policy to ensure your child's future. Here are the four things you should know before purchasing a child's insurance plan: 

• Wide Range of Benefits: A child insurance plan not only helps you cover the financial goals of your child; it also offers multiple benefits to it. Before purchasing an insurance plan, you must look at the benefits that will cater to your needs.

  Many plans allow partial withdrawal and waiver of premiums. These things are inbuilt in your insurance contract. If not, you can opt for a plan that offers them as a rider. 

  Adding a rider could increase your premiums slightly. You must look for a plan that will offer you benefits without increasing your premiums significantly. 

• Diversity in Plans: You get to choose between the ULIP or Non-linked insurance plans for your child. The plans will grow your corpus and will give you better returns. If you do not have an appetite for the market then you can opt for an endowment plan. It will give you lower returns but you will have a guarantee on returns. 

• Choices of Payouts: You can choose how you want your returns. You can choose to get the lump sum return towards the end or choose a regular payment. Under regular payments, you will receive small regular payments after the set interval. 

• Sum Assured: It is the prime reason for which we purchase insurance cover. Before taking insurance cover you must look at your financial goals and the sum assured that will help you achieve that goal. To get substantial income, you should look at various factors like inflation and interest rates. 

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Features of a Child Insurance Plan 

By investing in a child insurance policy, you get a safety net for their future. Some of the features of the child insurance policy are given below: 

• Maturity: A child insurance policy has a longer-term limit. You can choose the maturity period according to your child's age at the time of policy purchase. You must also consider various other factors like your financial goal, rate of interest, and inflation. If you do not consider these factors, the returns you yield might be lesser than what you expected. 

• Policy Tenure: Child-specific policies have maturity tenure until the child reaches the age of 18-21 years. It will differ from person to person. Policyholders must make note that their age should not cross 70 by the time policy matures. 

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• Policy Payouts: Child insurance policies provide an option to choose the form of payments. You can choose the lump sum form as your preferred form of payment or choose regular payments from the insurer. Such flexibility will help you meet your goals by providing finances at the appropriate time. 

• Premium Waiver: Premium waiver comes to the rescue if the insured parent passes away during the policy term. After the policyholder’s death, the policy will continue its existence. The rest of the insurance premiums until the term limit will be paid by the insurer. When the policy reaches its maturity period beneficiary will receive the insurance amount. Most insurers offer premium waiver benefits in their term and conditions. If that is not the case then you can add it as the rider with your policy. 

• Rider: You can choose riders like premium waiver, critical illness waiver, accidental death waiver, accidental disability waiver, etc. Most insurers add waivers like premium waiver rider and the accidental death rider to their plans.

  If your policy does not have the riders inbuilt, you can add them to your insurance cover. Adding a rider to the base insurance policy can increase your premiums. However, riders will ensure that the beneficiary will get additional monetary benefits along with the sum assured in case of an eventuality. 

• Partial Withdrawal: Partial withdrawal or partial liquidity clause is built in most child insurance policies. It allows the policyholder to make partial withdrawals from the insurer in case of a financial emergency. The penalties on the partial withdrawal will differ from insurer to insurer.

• Choice of Funds: Insurers of some plans allow the policyholder to choose from equity funds, debt funds, and hybrid funds to invest their money. The policyholder will have control over their investments. Market returns will depend upon the type of fund the policyholder chose. You can also choose between the option of a systematic transfer plan and a dynamic fund allocation plan. 

Benefits of a Child Insurance Plan

You need proper financial assistance in reaching every milestone of your child's future. A child insurance plan does exactly that. The benefits of the child insurance plans are as follows: 

• Financial Protection: Child insurance plans work as a safety cushion to your child's future. They provide all the necessary financial help to your child in case of an eventuality. The amount that your child will receive at the term maturity will be specified in the insurance coverage plan. 

• Investment: Along with the insurance cover child insurance plans also make investments. A policyholder can choose between ULIP and a Non-linked Insurance plan. This yields better returns on the corpus. 

• Lumpsum Payouts: Like all insurance policies child insurance policies also provide the returns at the time of the end of the term. In case of eventuality policy yields returns and pays to the beneficiary at the end.

• Tax Benefits: Child insurance policies are counted as investments and therefore offer tax benefits to the policyholders. You can claim up to Rs. 1.5 lacs on the insurance premiums under the Income Tax Act 1961 Section 80 C. 

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In Conclusion 

By purchasing a child insurance policy, you get better returns by taking advantage of the investment component. You can choose the option that will invest in financial instruments that will yield you better results. To get the most benefits from the child insurance policy, you need to invest early. This will give you a longer-term limit. A longer-term limit will lower your premiums. Most insurers invest in the equity market that brings better results if you make investments for a longer duration. You must always look for the policy that will be better suited to your needs and goals.