Term Insurance (Photo Credit: File)
With the ongoing uncertainty about the state of one’s income and job in the face of the pandemic wreaking havoc all over the world, you might face many sleepless nights thinking about your family’s future. You worry that in your absence, or in the absence of a regular income, the family cannot run the household, or pay children’s education bills, or even fund urgent medical procedures.
However, it is time to stop worrying and taking affirmative action instead. We advise investing in a child insurance plan to take the financial burden away from your future income – after all, your child deserves to make their dreams come true, and only you can help them on the path to success. A child plan is the best way to ensure this objective.
Why not a term plan or FD instead of child insurance?
A lot of people who have not yet taken an insurance plan for kids might not yet be on board with the concept of the child insurance in the first place. They might reason that instead of buying a child plan, they could invest the money in a faster growing ELSS (Equity Linked Savings Scheme), or even a bank FD. Some even argue in favour of buying a term plan which will yield a high corpus instead of child insurance, which has comparably higher premiums.
They believe that these instruments show greater bang for the buck. But do consider that a term insurance pays only upon the demise of the policyholder during the plan tenure. Here’s why buying a kids’ life insurance policy works out to be a better proposition:
• Saving money regularly to invest for your child’s education might become difficult in the face of rising inflation and many demands on your income. If you start a ULIP or another market-linked instrument and somehow lose focus or the discipline to keep investing in it, then the exercise will prove completely futile for your child’s future.
• In contrast, a child plan is designed to protect and support your child’s future scholastic ambitions. It takes into account the incremental increase in education costs every few years. Thus, when the plan matures you have a lump sum amount of money paid back to you after years of buying into the child insurance policy.
• The child policy is helpful in keeping you focussed on your child’s future goals. It pays the sum assured on maturity only, i.e. when the child turns 18 years of age, and not before. However, you can choose a regular/periodic payout option which pays regular sums to help you and your child stay on track for their future dreams.
• Unlike other insurance products in the country, insurers do not terminate the policy in the event that the child’s premium paying parent passes away during the plan tenure. Instead, the balance premiums are waived off for the payer, but the insurer pays the premiums till maturity date. Thus, whether you are present in your child’s life or not, your child’s future is still secured.
• Apart from traditional debt plans, child plans are available in many formats (depending on the insurer). In India, you can find market-linked kids’ insurance plans (these are ULIPs), which allow you exposure to both equities and debt to grow the plan corpus substantially till maturity.
• In case of life insurance, the premiums you pay fetch you tax deductions under Sec 80C of the Income Tax Act, 1961. The payback sum is treated as income, but is tax deductible under Sec 10(10D).
• The plan encourages you to think deeply about structuring your child’s future education. Parents are less likely to diverge from paying premiums on their children’s plans than on other financial goals like creating a bank FD or even starting a retirement fund for themselves. Insurers send timely reminders about upcoming premium payment dates and also offer a grace period for late payments.
Need to know before buying child insurance in India
Estimate how much money higher education will need. The costs of education in India and around the world keep rising periodically. Thus, the sum assured you choose must be commensurate with future cost trends. When choosing a ULIP type of kids’ insurance policy, study the funds and exposure ratio to the markets and associated risks. Check the policy for a premium waiver benefit. Choose a policy only if it has this feature – most reputed insurers in India provide this benefit. Use an online calculator to know the premiums payable. Base your projections using these numbers and discuss the policy in great detail with the insurer.