How Children’s Insurance Plans Work – Forbes Advisor INDIA

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Nothing can beat the joy of welcoming a baby into your family. There’s a lot of anticipation, and even more celebration. A baby changes your world! As parents, your dreams get bigger. An education that supports a high-flying career, a lavish marriage, the future needs of the child come first. In the excitement, one tends to neglect one’s other responsibilities such as buying a house, caring for aging parents, planning for medical contingencies and one’s own retirement corpus, etc.

You want the best for your children, it’s natural! But securing these life certainties should not come at the expense of your own future financial security and living comfort.

Children are an investment

Having a child is both a pleasure and an investment. Planning begins at the stage of pregnancy, as does spending. But you can still safely plan for your child’s future needs without having to worry.

Children’s insurance plans give you the financial discipline to secure your children’s financial future. Savings plan, it offers the double advantage of investment and insurance. The insurance component ensures the constitution of the investment corpus, by the insured or the insurance company. In a children’s insurance plan, the parent is the policy owner while the child is the beneficiary.

Benefits both children and parents

A parent’s highest priority is their child’s financial security. A children’s 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 agrees to pay you X amount of return for Y number of years, it is bound to do so and will not be recalled or modified. So whether you choose a regular income option, say from age 18, or a lump sum at a later age, your child is still financially covered. Returns can be structured according to your needs.
  • How long do I have to take the plan? The longer you stay invested in the children’s insurance plan, the better the returns. You can create a corpus that is accessible to you at specific stages – education, marriage, or business.
  • What happens if I die before the plan matures? Most children’s plans have a “waiver of premium” (WOP) feature. This gives your child a double advantage. First, if the insured dies prematurely, the insurer immediately pays the sum insured to the agent. Second, the policy is not terminated; all future premiums are waived and the insurance company pays the policy premiums on behalf of the policyholder and pays the child when the policy matures. So your child is fully covered and has an income stream whether you’re there or not.
  • What happens if I can’t pay the premiums? Don’t worry, children’s plans offer flexible premium payment terms, meaning premiums can be paid in installments. You can also choose a sum insured based on your affordability and purchase an additional policy if you want to increase coverage later, when possible.
  • Is a children’s plan only taken out to cover the costs of education, marriage, etc.? Children’s plans can be used to meet several requirements. They can be used for systematic money transfer or wealth transfer. Children’s plans can be used as an estate planning tool or to create a regular source of income for children who are unemployed (for example, a daughter who is a housewife) or who have different abilities.
  • Can only parents make a plan for the child? Anyone can take a children’s diet, for example, a grandfather can take it to protect the future of his grandchild.

It should be noted that children’s insurance plans are not only structured to protect the financial interests of the child. They also provide financial flexibility and peace of mind for parents.

Plans for children vs. other investments

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

In comparison, traditional investments present the following challenges:

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

Most people don’t consider children’s insurance plans to be a huge investment choice. You have just learned about the advantages offered by children’s insurance plans. 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 company while Surbhi is a housewife. Ramesh invested in mutual funds to fund Suraj’s dream of becoming an aerospace engineer. He also has a term insurance scheme of which Surbhi is the beneficiary. The couple recently took out a home loan to buy a bigger house to accommodate Ramesh’s aging parents. Unfortunately, Ramesh dies suddenly and Surabhi is responsible for paying for 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 uses the death benefit received from the policy to pay off the home loan. Suraj takes a part-time job to support the family and gives up on her dream.

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

Scenario 2: Ketan and Aruna have just retired from their government jobs and are looking forward to their sunset years. Their pension capital and their pension are sufficient to cover their needs. When their only son quits his job and needs the money to start his own business, they give him the whole corpus because they don’t 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 settle. Ketan has no choice but to mortgage their house to support Aruna and her son’s family.

How a kid’s plan would help: If Ketan had taken a kid’s plan when his son was a toddler, he would have built a sizable corpus. His son could have used it 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 mother. She now has to find a new apartment and pay rent. She will also need furniture, appliances and a maid to take care of her two daughters. With child support that barely covers the school education of her two daughters, how will she support her children’s future on a salary of INR 60,000 a year?

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

These situations are not unheard of, but they just show how an unexpected turn of events can derail even the best plans for your children. Children’s diets provide complete security for the benefits they provide.

Tips for choosing a child plan

There are many children’s insurance plans out there, but the key to choosing the right one is to first identify your goals. Here are two important questions you need to ask yourself:

  • What are the purposes I am saving for? – Is it for your child’s higher education, his marriage, or simply to make him financially independent? Does your child have a medical condition that may require costly treatment in the future?
  • What risks am I protecting my child from? – Are you worried about the early death of the breadwinner? Is there a family dispute that could affect your financial situation? Are there any borrowings 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 some points to consider:

In fact, you should ideally buy it as soon as your child is born. This will help you build a better corpus because 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 it is 10 years old, it will only give you 8 years of compound interest. But if you buy it when it’s 2 years old, you’ll get 16 years of compound interest.

Economic vagaries and inflation can impact your financial planning. The sum insured you sign up for must be worth a decade or two later. What seems like a large amount today may not even be enough to pay for critical needs at that time.

  • Due diligence is important

Do your due diligence by researching the benefits of the children’s insurance plan and go through the policy terms and conditions thoroughly before signing up.

For example, be sure to use the waiver of premium option in the event of the early death of the breadwinner. This will ensure that the policy is still valid and the insurer continues to pay the premiums, saving you money.

You can also check to see if the plan offers you a policy loan, tax benefits on premiums paid, and if the plan allows partial withdrawal to meet the child’s unforeseen needs.

Conclusion

Children are a precious proposition that requires resources for life. Children today are different from those of your childhood and therefore their needs are different. People should consider child insurance plans as important as any other investment. This is hugely important and requires the same commitment and financial discipline as, say, paying an equivalent monthly installment (EMI) for a house or a car. Raising a child should be a careful decision, not just an emotional one.

As a parent, you are responsible for ensuring that your child’s future unfolds according to plan. The comprehensiveness of life insurance plans – protection, guaranteed and structured returns – makes them the best solution.

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