Driven by the aspirations of youth and improved lifestyle, the cost of living is increasing by the day. Parents have to consider many additional expenses like higher education, medical costs and recreational expenses while doing financial planning for their children. Tapati Ghose, Partner, Deloitte India and Robin Bose, Assistant Manager, Deloitte Haskins and Sells LLP believe that this has forced parents to take measures to secure the future of their children and address increasing medical costs. "These factors have given rise to various child insurance plans. The most common plans require premium payments on a periodic basis (annually, quarterly or monthly) and a lump-sum amount is received on maturity or via regular instalments, as per the policy," the Deloitte experts said. 

Benefits of life insurance policy

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Most life insurance policies go beyond protecting the children. They can also be used to take loan at more competitive rates than other modes. The loan amount depends upon the amount covered under the policy. These policies also cover hospitalisation expenses and critical illness treatment.

Income Tax benefits on premium paid for children 

Tapati Ghose and Robin Bose explained that life insurance premiums paid during the financial year by the parent can be claimed as a deduction under Section 80C of the Income Tax Act which is capped at Rs 150,000. The experts said that one should keep in mind that the annual deduction is restricted as below:

· Premium paid up to 20% of the sum assured if the policy is issued on or before March 31, 2012

· Premium paid up to 10% of the sum assured if the policy is issued on or after April 1, 2012.

· Premium paid up to 15% of the sum assured if the policy is issued on or after April 1, 2013 on life of any person who is a person with disability or severe disability as per Section 80U or person suffering specified diseases as per Section 80DDB.

"The amount received on maturity of life insurance plans would be exempt if the premium payable for all years does not exceed 20% for policies taken on or after April 1, 2003 and 10% for policies taken on or after April 1, 2012 respectively. In case, the policy is issued on or after April 1, 2013 on life of any person who is a person with disability or severe disability as per Section 80U or person suffering specified diseases as per Section 80DDB, then the premium payable should not exceed 15% of the sum assured," they added. 

The Deloitte experts explained that health insurance premiums paid during the financial year for dependent children can be claimed as deduction under Section 80D of the Income Tax Act. "The deduction for the health insurance premium paid (other than cash) for self, spouse and dependent children is limited to Rs 25,000 in aggregate. In case, the individual or spouse is a senior citizen, then the deduction can be claimed up to Rs 30,000," they said. 

What are the supporting documents required

To make sure that your claim is not rejected, you need to maintain a few documents. "Taxpayers have to maintain policy documents and the premium paid receipts to claim the deduction or exemptions. These documents have to be submitted to tax authorities in case of scrutiny proceedings," the experts said. 

Things to keep in mind

Sandeep Bhardwaj, Chief Sales Officer, Angel Broking Ltd explained that insurance premiums for your children must be necessarily paid by claimant through cheque/DD/NEFT/IMPS and such other banking channels only. "Cash payments are not accepted," he said. "Tax deduction under Section 80C is available to an individual if the premium on life policy is paid on their own life, life of spouse and children. Here the Income Tax does not differentiate between biological children and legally adopted children," Bhardwaj added.