Child savings plan is a combination of saving habits and life insurance policies. It helps parents to accumulate a financial corpus and protect it from any untoward circumstances. Child savings plans are specifically created to help kids achieve their major life goals like higher education, professional courses, marriage, etc. Moreover, these plans will make sure that there will be some corpus for kids after the death of their parents as well.
What are Child Savings Plans?
A child savings plan is basically a life insurance-based savings scheme. It helps you accumulate finances for your child’s future financial needs. Child savings plans come with a guarantee that you will get your financial goal achieved, whether it may happen through a lump sum payment at maturity or installment-wise payments depending on your needs. Depending on the plan, you can invest and receive money at your convenience.
Reasons to Start Saving Money for Kids
Here we are discussing a few reasons why it becomes important to start saving money for kids from their birth:
Birth of a Child
As soon as your child comes into this world, you must have some financial plans ready. From paying medical bills to vaccination, many other things need financial planning for their proper completion. Accumulating finance from the very beginning would prove to be very helpful for you.
Educational Needs
Your child will surely need some financial assistance for his/her education from school to college level. Apart from paying fees, you also need to invest in buying books and accessories for him/her.
Planning for Higher Education
Nowadays, parents try to make sure that their children become educated professionals. You also need to plan for their further education by creating a financial corpus. It will make sure that they don’t face any problem getting their dream education.
Money for Marrying Your Daughter/Boy
It also depends on individuals how much they want to save for their kids’ marriage expenses. Creating some extra corpus for marriage will help them to arrange everything without disturbing other investments.
Saving for Unexpected Situations
Many unexpected expenses might arise in their lives during their growing years. You need to prepare yourself financially to handle them. Saving some money could work as an alternative to borrowing money.
Steps for Creating a Secure Financial Future for Your Child
Obtain Adequate Life Insurance Protection
A life insurance policy is an integral part of every person’s financial planning. Most of the child savings plans come with a premium waiver plan under which, in case of the death of the insured person, no more premium payment will be required, and he/she will continue to receive the benefit. Such a feature helps in protecting the child’s financial future.
Take Advantage of Tax Exemption Under Relevant Laws
Most of the child savings plans come with some tax benefits under the provisions of the Income-tax Act, 1961, as per current law.
- Under section 80C of the Income Tax Act, premiums paid would be eligible for deduction, subject to the maximum prescribed limit.
- Under section 10(10D) of the Income-tax Act, if any policy satisfies the provisions mentioned in the Act, then the maturity benefit will be tax-free.
Popular Financial Instruments for Creating Kids’ Future Corpus
Parents usually consider different financial instruments for the sake of their kids’ future.
Fixed Deposits
Bank Fixed Deposits are considered to be among the safest investment instruments. Parents who wish to save money in a safe and secure place prefer FDs because of their guaranteed returns and safety. However, returns offered by FDs may not outsmart long-term inflation.
Term Insurance
Term insurance does not create any corpus but provides life cover in exchange for low premiums. In case of an unfortunate happening during the tenure of this insurance, the nominee receives the death benefit, and it will help secure your child’s financial future. Financial planners usually recommend term insurance as an important component of a family’s financial security plan.
Child Savings Insurance Plans
Child savings insurance plans are one kind of insurance plans which also provide opportunity for creating your kid’s corpus. Such plans are quite flexible in terms of providing various features like guarantees, bonuses, market-linked returns, premium waiver option, milestone benefits, etc. Before buying child savings insurance, you need to carefully analyze your risk profile, premium commitment, etc.
Child Savings Plans through Unit Linked Insurance Plans (ULIP)
Unit-linked insurance plans (ULIPs) are a type of insurance plan where a certain amount of your premium is utilized to create a corpus for the sake of protection. The remaining amount of the premium is invested in market-linked assets according to the investor’s choice. Such plans help in building your kid’s corpus. Child-oriented ULIPs have some extra features like fund switching, loyalty additions, wealth boosters, and premium waiver, which make them ideal for long-term savings. But like other mutual funds, ULIPs do not guarantee returns from their investment.
Many investors compare projected returns using a Compound Interest Calculator before investing in ULIPs or other long-term savings options, as it provides an estimate of how consistent contributions and compounding can help build a substantial corpus over the years.
Important Factors to Consider While Choosing a Child Savings Plan
While buying a child savings plan, you need to consider various factors as listed below:
- Your financial needs, target corpus, and policy tenure/maturity date
- Premium payment options available under the plan
- Protection provided in the form of life insurance
- Availability of premium waiver plan, Market-linked or guaranteed returns
- Financial requirements adjusted with inflation
- Partial withdrawal facility
- Taxation rules related to relevant tax laws
- Affordability factor with respect to the family’s monthly budget
Selecting a plan accordingly will serve your purposes in creating a financial corpus for your kid.
Conclusion
Creating a financial corpus for kids’ future needs has become a top priority for parents these days. Increasing costs of education and rising expectations have forced parents to make financial plans from their kids’ birth.
Such plans help in saving money in a disciplined manner, along with the protection of that money against all kinds of risks. Be it your child’s higher education, marriage, or something else, whatever your purpose might be, you just need to invest some money in a disciplined manner.