As parents, we always want the best for our children, particularly in terms of their education. Owing to the increase in education expenses, many parents have started to look for alternative investing possibilities to help support their children’s education. However, when it comes to your child, you cannot just rely on investments but have to take insurance as well in case one of the parents unfortunately passes away.
Child Education Plans are one of India’s most popular investment alternatives. These plans are offered by insurance companies and are intended to provide financial assistance for your child’s higher education expenses. Amidst so many plans available around us, it is imperative to know which is the best child plan for you to choose for your child. In this article, we will be talking about different plans and their features.
What are Child Education Plans, and How Do They Work?
Child Education Plans are financial solutions designed to fund your children’s education. They are long-term investments that allow you to save for your children’s higher education over the tenure of the policy.
These kinds of plans requires you to pay periodic premiums, which might be monthly, quarterly, semi-annually, or annually during the insurance term. In exchange, the insurance company pays a lump sum at maturity. When your child reaches a certain age, the maturity amount from the best child plan you have selected for them can be paid in one single sum, or it can be paid out in installments at various stages of their education or age. This is dependent on the type of plan you are investing in.
Types of Child Education Plans
Child Plans can be divided into two types according to the payout offered:
Child’s ULIP Plans:
These Child Education Plans offer a lump-sum payout at the end of the policy term. While maturity proceeds from these plans can be utilized for any purpose, the primary intention is to provide funds for the child’s higher education expenses. Child ULIPs, like other Unit Linked Insurance Plans (ULIPs), invest in both equity and debt instruments. The only distinction between a Child Education Plan ULIP and other ULIPs is the tenure offered. While the usual ULIPs have policy durations starting from 10 to 25 years, the payout for a child Education Plan ULIP starts to happen when the kid turns 18. The amount of coverage you should have can be easily calculated using the ULIP calculator
Child Endowment Plans:
This type of Child Education Plan offers life insurance and guaranteed returns. These plans normally provide four payouts equal to 25% of the sum assured plus any relevant bonus starting after the kid reaches the age of 18. This sort of Child Policy has a minimal level of risk because it provides guaranteed payouts. These plans, however, frequently provide relatively low returns.
Money-Back Insurance Plans:
Children’s money back insurance plans are similar to endowment plans, however, they provide regular returns at set periods which can easily be calculated using the ULIP calculator. Returns are typically calculated as a percentage of the sum assured at 5 or 10-year periods. This sort of insurance plan intends to give the combined benefit of an endowment and a money-back policy to cover the children’s educational expenses. You will receive periodical returns, as well as the maturity amount when the policy matures.
Key Features of Child Education Plans.
Life Insurance Cover:
Child Education Plans provide life insurance coverage, with an amount assured of up to ten times the annual premium paid. The maximum limit for coverage is set by India’s insurance sector regulator, the Insurance Regulatory and Development Authority of India (IRDAI). Thus, the life insurance maximum for a Child Plan with an annual premium of Rs. 50,000 will be Rs. 5 lakh. However, this is the minimum coverage, the right coverage for your child can be easily calculated using the ULIP calculator.
Investment Options:
Child Endowment Plans do not allow policyholders to choose specific asset classes to invest in. Insurance firms automatically select investments on behalf of policyholders, which are primarily debt investments such as government bonds, corporate bonds, and Treasury bills. On the other hand, the best child plan such as ULIP Plans provides policyholders with some control over where their money is invested. However, the number of funds available is limited to those controlled by the insurer.
Lock-In Period:
Both forms of Child Education Plans now offered in India have a 5-year lock-in duration. Most of the best child plan allow for partial withdrawal beginning in the sixth year. After the 5-year lock-in period is up, the policyholder has the option to surrender their insurance policy and withdraw all savings.
Charges:
The policyholder is responsible for paying different type of expenses associated with Child Education Plans. These include fees for fund management, premium allocation, and policy administration, among others. Since the child plans include a life insurance component, premiums paid to keep the child policy in effect provide tax deduction benefits under Section 80C. However, there is a maximum limit of Rs. 1.5 lakh u/s 80C in total, which includes other popular tax-saving instruments such as Tax Saver ELSS Mutual Funds, Public Provident Fund (PPF), Employees’ Provident Fund (EPF), Life Insurance Plans, etc.
Tax Benefits:
Since Child ULIP plans include an insurance component, premiums paid to keep the policy in effect provide tax deduction benefits under section 80C. However, the maximum limit for which you can get dedication under Section 80C is Rs. 1.5 lakh, which covers other popular tax-saving instruments such as Tax Saver ELSS Mutual Funds, Public Provident Funds (PPF), Employees’ Provident Funds (EPF), Life Insurance Plans, and so on. The payout from these plans is tax-free as long as the yearly premium is less than Rs. 2.5 lakh per year. If the annual premium paid exceeds Rs. 2.5 lakh, the payout will be subject to the applicable Capital Gains Tax laws. This clause has been included in the Finance Bill of 2021.
How Can I Choose the Best Child Education Plan?
Choosing the best education plan is an extremely important financial decision because it affects your children’s future. Here are some aspects to consider while selecting the appropriate plan for your child:
Type of Insurance:
First and foremost, you should decide whether you need a children’s education plan, an insurance plan, or a mix of the two. Children’s insurance policies provide financial protection for your child in the event of death, whilst education plans solely cover your children’s future educational expenses.
Coverage Amount:
You should assess the type of coverage you need based on the sort of course your child plans to follow in the future. Tuition fees, inflation, living expenditures, and other factors can be used to assess the required coverage amount and select an appropriate plan.
Premium Amount:
The premium’s affordability is an essential element to consider. You should choose a plan with a premium that fits your budget and does not exceed it.
So we are saying,
Finally, child education plans allow you to financially protect your child’s future while also providing peace of mind. Understanding the various plan types, features, and tax benefits will allow you to make an informed decision about which plan is best for your requirements and budget. When selecting a plan, keep your child’s age, your risk tolerance, and their long-term educational goals in mind. Consult a financial advisor for personalized advice on selecting the best fit and ensuring your child’s future success.
