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Features of Child Insurance Plan

When you become a parent your responsibility increases double-fold. Planning for the child’s future becomes a priority. You have to consider the multiple needs that arise during different growth stages of your child. It could be planning for your child’s education, marriage, etc. If you plan to invest in an insurance plan, the features of child insurance plan should include a tax savings aspect to benefit the parents as well. Read on for more details about the child investment plan.

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Features of Child Insurance Plan

Features of Child Insurance Plan: You Need to Know

Features of Child Insurance Plan
November 14, 2024

Table of Content

 

What is a Child Insurance Plan?

A child insurance plan is an investment tool specially meant for children. This child investment tool enables the creation of a corpus over time. The lump sum payout on maturity helps fund your child’s education, marriage, etc. The child insurance plan features investment growth when you are around and insurance coverage in case of any mishap or eventuality.

While you are building a corpus for your child’s future with periodical investment in this life insurance for children, the plan also serves as a safety cushion for this corpus in case of your sudden demise. In case of your untimely demise, the funds are invested on your behalf and provide the lump sum you aimed at on maturity. Periodical payouts to align with the important milestones of your child are also notable features of child insurance plan.

This plan is the best way to safeguard your child’s future goals. Compare the various plans available and choose the one that suits your budget and requirements.

9 Key Features of a Child Insurance Plan

The unique features of child insurance plan differentiate it from other ordinary insurance plans. Some of the key features of the plan are:

  • Life/Health Protection

All life insurance policies provide life coverage. The extent of coverage is proportionate to the premium you pay. In a child insurance policy, you can opt for both life cover as well as health protection.   

  • Low Premium

One of the attractive features of child insurance plan is substantial coverage for the lowest premium. One of the reasons for this low premium is that these are child goal protection plans. Also, the various subsidies for child plans reduce the cost.

  • Guaranteed Investment Returns

Investment in assets that offer high returns carries market risk. The returns are high if the market performance is good and low when the performance is poor. There is neither guaranteed return on investments nor capital protection. If the investment is for your child’s financial security, go for a plan that suits your requirements. One of the distinct features of child insurance plan is guaranteed returns on investment.

  • Tax Benefits on Payments and Returns

The premiums paid towards child plans are eligible for deduction up to Rs. 1.50 lakhs from the parent’s taxable income under Section 80C of the Income Tax Act 19611. This is one of the important features of child insurance plan. The maturity proceeds are tax-free, making them a lucrative investment option for securing your child’s future. The child plan tax benefits are governed by tax laws and subject to periodical changes.

  • Investing for the Future

The investment in the best child plan is generally for children’s future goals. Parents start saving when their children are young to create a huge corpus. Some plans allow investment for a newborn baby as well. The accumulated funds come in handy for a child marriage plan, education, building a career, etc. These plans also provide additional bonuses and returns, making them the best tool to safeguard the child’s future while providing peace of mind to the parent.

  • Investing for Long Term

A long-term investment provides higher returns. Follow the strategy and invest in your child’s future when he/she is still young. Assuming that the investment is to fulfil your child’s education goals of pursuing higher education abroad, the requirement of funds will be when he/she is around 20 years old. With a term higher than 15 years, you can derive the benefit of high returns at lower premiums.

  • Partial Withdrawal

This is one of the most interesting features of child insurance plan. You are allowed to make partial withdrawals from investments made to date to meet emergency fund requirements. In addition to higher returns and tax benefits1, the child life cover which considers short-term and unforeseen events in the family is an ideal investment plan.

  • Add-ons

In addition to the savings and insurance component, the flexibility to choose riders is one of the pivotal features of child plan. Some of the riders are adding a second child in the same plan, which helps extend benefits to both the children, critical illness coverage that ensures funds are available for the treatment of illnesses mentioned in the plan, an extension of period that allows extension of the tenure of the basic plan without undergoing any formalities, etc.

  • Lower Management Fees

Generally, the management fees like maintenance, handling, and claim approval charges add to the cost of the insurance plan.  Since a child plan is for children’s financial security, the insurance companies charge low or nil charges for the plan. This is one of the distinctive features of child plan that further makes it an economical investment.

How to Make Your Child Plan Tax Effective?

The capital gains on a child insurance plan can be high as it is a long-term investment plan with high returns. For significant financial benefits, it is imperative to make the child plan tax-effective.  

Tax Benefits on premium payments: As per section 80C(2)(i) of the Income-tax Act, 19611 (‘the Act’), the amount paid by parent on child insurance plan during the previous year to effect or to keep in force an insurance on the life of the any child is allowed as deduction while computing taxable income, subject to the aggregate limit of Rs.1,50,000 and subject to the other conditions stated therein.

It is to be noted that premiums paid only to the extent of 10% (for policies issued on or after April 1, 2012) of the death sum assured should be available for deduction under section 80C(2) of the Act1.

Further, if premiums are paid under a health insurance plan/ health rider attached to a life insurance plan for his dependent children by a parent, out of his taxable income then such investments are eligible for deduction under section 80D of the Income-tax Act, 19611  (‘the Act’).

Tax Benefits on Maturity payouts : Proceeds from a child insurance plan can be tax exempt  under section 10(10D) of income tax act1 on satisfaction of the following conditions:-

a) Death sum assured should be at least 10 times the annualised premium throughout the policy term.

b) In case of ULIPs issued on or after 01-02-2021, Aggregate annual premium should not exceed Rs. 2.5 lakh for all the ULIP policies held by the policyholder (parent) with all life insurers.

c) In case of Non-ULIPs issued on or after 01-04-2023, Aggregate annual premium should not exceed Rs. 5 lakh for all the Non-ULIP policies held by the policyholder (parent) with all life insurers.

Thus, making an informed decision will not only help secure your child’s future but also safeguard the objectives the child savings plan is meant for while making it tax-effective.

Summary

The main concern of parents is securing the future of their children. Accumulating funds for their children’s security can make their lives stress-free. How to do this? Investing in child insurance plans like a Child ULIP plan which has both the life cover as well as the investment components, can safeguard your child’s future even when you are not around. Review the features of child insurance plan of different insurance companies and invest in one that suits your pocket and requirements right away if you do not have one.

FAQs on Features of Child Insurance Plan

Q. How does goal protection work in a child insurance plan?

The child insurance plan ensures that funds are available for specific milestones of your children like pursuing higher education, starting a business, marriage, etc. In case of any eventuality, the insurance company provides a lump sum benefit that ensures financial stability for your child to achieve his/her goals.

Q. Can I make partial withdrawals from my child insurance plan?

Yes. You can make partial withdrawals from your child's insurance plan. The withdrawal is permitted only after the lock-in period of 5 years.

Q. Are child insurance plan returns tax-free?

Yes, child insurance plans and returns are tax-free. The payouts received from life insurance plans on maturity are tax-free under Section 10(10D) of the Income Tax Act 19611. The proceeds along with the bonuses received under the child insurance plan on maturity, are tax-free.

Q. Can I change my investment strategy in a child insurance plan over time?

Yes. You can change your investment strategy in a child insurance plan to match your evolving needs. The option to switch investment options or adjust the coverage amount as per changing financial goals and market conditions is available.

Q. What is a systematic transfer option in child insurance plans?

A systematic transfer option in a child insurance plan is a strategy adopted to deal with market volatility. It allows the transfer of funds from one asset to another to reduce the losses incurred from assets not performing well.

Related Articles

Reference links:

https://cleartax.in/s/child-insurance

https://www.forbes.com/advisor/in/life-insurance/child-education-plan/

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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Here's all you should know about Child Investments.

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1. Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions. Tax Laws are subject to change from time to time. Customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law. 

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