Child Education Plans, also known as Child Plans, are comprehensive financial products offered by insurance companies. These policies serve as a combination of investment and insurance, specifically designed to address parents’ concerns regarding their children’s education expenses.
These plans act as investment plans that help parents to accumulate funds for their child’s higher education needs during the policy duration. Simultaneously, they offer a safety net by ensuring financial protection for the child in the unfortunate event of the parent’s premature demise.
A fraction of the premiums paid towards the plan provides life coverage, safeguarding the family’s well-being. The remaining portion is invested in either Equity or Debt instruments, aiming to generate capital that can be utilized for the child’s educational requirements. It’s important to note that in Child Education Plans, the life insurance coverage is extended to the parent.
These plans mature when the child turns 18 and the final payout is given.
Features of Child Education Plans
- Incorporated Life Insurance Cover: Child Education Plans encompass a life insurance cover, with the assured sum reaching up to 10 times the annual premium. This assurance adheres to guidelines from India’s insurance regulatory body, the Insurance Regulatory and Development Authority of India (IRDAI). For instance, a Child Plan with a yearly premium of Rs. 50,000 will have a life cover limit of Rs. 5 lakh.
- Investment Possibilities: Child Endowment Plans allocate investment choices to insurers, primarily involving Debt investments like Government Bonds, Corporate Bonds, and Treasury Bills. Conversely, Child ULIP Plans offer policyholders a degree of control over investments, albeit within a limited range of insurer-managed funds.
- Lock-In Period: Presently, both types of Indian Child Education Plans come with a 5-year lock-in period. Post the initial period, partial withdrawals are permitted in most cases, and policyholders can opt for full surrender and withdrawal after the lock-in period concludes.
- Associated Charges: Various charges are associated with Child Education Plans, encompassing fund management charges, premium allocation charges, and policy administration charges, among others.
- Tax Advantages: Premiums paid for sustaining the child policy qualify for tax deductions under Section 80C due to the life insurance aspect. However, the cumulative limit of tax-saving instruments, including Child Plans, Tax Saver ELSS Mutual Funds, PPF, EPF, and Life Insurance Plans, must not exceed Rs. 1.5 lakh under Section 80C.
Limitations of Child Education Plan
While Child Education Plans offer apparent advantages like life insurance, capital growth, and tax benefits, a closer examination reveals important limitations to consider before selecting this policy:
Low Life Cover: Life coverage in Child Plans is capped at 10 times the annual premium, such as Rs. 5 lakh for a Rs. 50,000 premium. This limited coverage is considerably lower compared to standalone term plans, which offer higher coverage at a lower cost.
Diversion of Premium: A portion of the premium isn’t invested, as it goes towards providing life coverage. With charges deducted from premiums, the potential payout diminishes, affecting the overall benefit of Child Education Plans.
Limited Investment Options: Child ULIPs offer restricted investment choices within insurer-managed funds. In Child Endowment Plans, the insurer, not the policyholder, decides asset classes for investments, curtailing investment selection flexibility.
Restricted Flexibility: Child Education Plans have a mandatory 5-year lock-in period with no withdrawals allowed. Altering policy terms, like premium or coverage, post-initiation is typically prohibited, limiting policyholders’ flexibility.
Should you choose to invest Child Education Plan?
While certain individuals might be tempted to choose a Child Plan primarily due to the tax advantages it provides, it’s crucial to remember that prioritizing sufficient funds for children’s higher education remains the core objective. You can make a child education planner to understand the funds required to attain these goals. Alternatively, individuals seeking tax benefits can explore ELSS Tax Saver Mutual Funds, offering a shorter lock-in period of 3 years compared to Child Education Plans.
