Ch. 5: How Much Child Plan Coverage Do I Need?

As a parent, you obviously want to make sure that your children receive the best possible care as they grow up, go to the finest schools and colleges, and have the most promising future possible. Major milestones in your child's path include their higher education, marriage etc., which require enormous capital. Here is where child insurance plans come into play. A child plan is a safety net to protect your child’s future.

After reviewing every aspect of the Child Plan, you've finally decided to go ahead. But, how much capital do you need exactly to secure your child’s future?

The amount you require for your child’s future needs should be calculated in advance to decide on the cover amount. Your calculations must also reflect the rising inflation rates since the policy returns must also match them. Therefore, it is essential to figure out the cover amount prior to buying a child plan.

It is the amount of coverage you choose when buying the policy. Generally, in a child plan, you are the policyholder, and your child is the beneficiary. You need to pay the premiums till the end of the payment period to keep the policy active. In general, a child plan is a way to save up for major costs such as education, marriage, etc.

The significance of the child plan is that the policy does not terminate if you pass away during the policy period. Any future premiums will also be waived till the policy matures. Death benefits will be paid out instantly, and the policy will be in effect until its maturity. The death benefit is made up of the sum assured along with any accrued bonuses.

You can choose to receive the sum assured as assured payouts over a period of time. A particular percentage of the sum assured can be received as payouts during the policy term. They are payable to you a few years after the premium payment term is over. However, this condition shall vary across policies. These periodic payouts are useful when you want adequate funds for various critical junctures of your child's life. After the policy term ends, you will either receive the sum assured, the sum assured with accumulated bonuses, or only the bonuses - depending on the product.

Note: Each product may have different customising options regarding the frequency and type of payouts.

And lastly, the maturity benefit consists of the amount assured along with any accrued bonuses. You will only earn bonuses if you have a participating policy. According to the product selected, you may sometimes only receive your accrued bonuses.

Decide the amount of coverage that will meet your child's needs, whether for a wedding, higher education, or any long-term financial goals they may have. When you calculate the amount of coverage you need, make sure you take into account all of your financial responsibilities so you don’t end up with an insufficient cover amount.

You will need to -

You need to plan thoroughly, and decide whether you want the cover for educational milestones, wedding expenses, or any other milestones.
You will also need to determine if you want the cover for undergraduate studies, postgraduate studies, or both and whether your child wants to study in India or abroad. Coming to weddings, you will need to figure out the age at which your child will get married, how big the wedding will be, the location, etc.

Make sure you thoroughly investigate the costs for the milestones you plan on covering. Remember that the cost of education, amongst other expenses will only rise, as your child grows old. Figure out the costs for the same in today’s time and account for 10-12% inflation for 12-15 years to finalise the cover amount. It is prudent to include inflation as you are estimating these costs for the future.

This is a very important step. In this way, you will be able to determine how much coverage they need, without hampering the family’s financial stability. You should be able to cover your child's financial needs in case of your absence.

Remember you are making a long term commitment to invest. Ensure you think about your budget and whether you will be able to pay the required premiums on time. This will depend on your job, financial stability, etc.

Premiums need to be paid for a specified period. Keep in mind that you will only receive a payout when your premiums are paid on time.

You can estimate the funds you will need for your child’s education or marriage using our Child Future Planning Calculator.

There needs to be a healthy balance between both aspects - the cost of your aspirations and the budget you can spare for the policy. Calculating this will give you the right cover amount.

The main objective of a child plan is to provide financial stability to your child so that their dreams are not jeopardised in any way. The right cover amount assures that all your child's future necessities are met. Make sure you keep economic aspects and your child's requirements in mind while choosing the premium and sum assured.