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Everything You Need To Know About Child Education Plans
Ajay recently overheard a coworker say he spent more annually on his son’s school tuition than on his IIT Kharagpur annual fees. Ajay initially believed his coworker was making things up, but he wasn’t sure, so he decided to verify it. He was startled to see that the elementary school in his neighbourhood charged pupils about Rs. 30,000 in regular fees every three months, plus an additional Rs. 25,000 in development costs. Given that his semester fees for the B.Tech programme at BIT Mesra were roughly Rs. 35,000 in 2009, Ajay understood that his colleague was not exaggerating. He was now concerned about the cost of college when his 2-year-old kid started attending classes there at around 16 years.
As parents, we always prefer the best for our kids, especially in education, so the sharp increase in school prices is concerning. To pay for their children’s education has prompted many parents to look
into different investment choices. Child education plans are one well-liked option. Child Education Plans are insurance plans designed specifically for parents who want to pay for their children’s higher education costs. Parent’s interest in these programmes has grown due to higher education prices.
We’ll discuss child education plans in this blog post, including their types, benefits, and suitability for paying for your child’s higher education.
What Are Child Education Plans And How Do They Work?
Insurance firms offer investment-based insurance policies known as “Child Plans” or “Child Education Plans.” These are promoted as investments that enable parents to put money aside throughout the procedure to pay for their child’s higher education costs while offering the child financial stability in the event of the parent’s untimely death.
A section of the plan premiums is used to provide life insurance, and the sum is invested in debt or equity instruments to assist the child save for higher education costs. The parent is also covered by life insurance in the case of a child’s education plan. When the children will reach the age of eighteen, these insurance policies mature, and the last payment is made.
Types Of Child Education Plans
Child ULIP Plans
After the insurance term, these Child Education Plans provide a lump sum payout. Although the maturity proceeds of all these plans can be used for any reason, the main objective is to provide fund for the child for whom the program is acquired to pay for higher education costs.
Like other Unit Linked Insurance Plans schemes, child Unit Linked Insurance Plan invests in equity and debt instruments Unit Linked Insurance Plan. The tenure offered is the only variation between a Child Education Plan scheme (ULIP) Unit Linked Insurance Plan and other Unit Linked Insurance Plans. While ordinary Unit Linked Insurance Plans are available with a policy between 10 to 25 years, a Child Education Plan Unit Linked Insurance Plan pays out when the beneficiary reaches the age of 18.
Child Endowment Plans
This type of child education plan offers assured returns and life insurance coverage. After the child turns 18, these plans typically start making 4 payouts, each equivalent to 25% of the sum assured plus any applicable incentives. The level of danger in this kind of child policy scheme is low because of the guaranteed payouts. However, the back provided by these strategies is frequently relatively meagre.
Key Features Of Child Education Plans
Life Insurance Cover
Child Education Plans Unit Linked Insurance Plan has a life insurance component, with a sum assured that can be up to 10 times the annual cost. This life cover limit follows the regulations set forth by the Insurance Regulatory and DAI, which oversees the country’s insurance market (IRDAI). Therefore, a child plan with a 50,000 rupee yearly premium will have a 5 lakh life cover limit.
Investment Options
Policyholders in Child Endowment Plans cannot choose which asset classes to invest in. Insurance firms automatically make investments on behalf of policyholders, primarily debt investments, such as Treasury Bills, Corporate Bonds, and Government Bonds.
Contrarily, Child Unit Linked Insurance Plan gives policyholders considerable flexibility regarding how their funds will be invested. The list of funds manage by the insurer is the only pool from which to pick, though. For instance, the policyholder of the State Bank of India Smart Scholar can select from a choice of 9 funds. At the same time, the ICICI Smart Kid Solution gives 13 fund alternatives spanning the categories of equity, debt, and hybrid funds.
Lock-in Period
Both types of Child Education Plans are currently offered in India and have a lock-in period of five years. From the sixth year onwards, partial withdrawal is allowed in the case of most Child Plans. The policyholder might also surrender the policy and withdraw all investments after the 5-year lock-in is completed.
Charges
Child Education Plans feature several fees that the policyholder is responsible for covering. These fees cover fund management, premium distribution, policy administration, etc.
Tax Benefits
The kid policy’s premiums are eligible for a tax credit under Section 80C because of the life insurance component.
The absolute limit under Section 80C applies to other well-known tax-saving vehicles like Tax Saver ELSS Mutual Funds, Public Provident Funds (PPF), Employees’ Provident Funds (EPF), Life Insurance Plans, etc., is Rs. 1.5 lakh.
As long as the yearly premium paid is less than Rs. 2.5 lakh annually, the payment from these plans is tax-free. The dividend received will be subject to applicable capital gains tax regulations if the annual premium paid is more than Rs. 2.5 lakh. The Finance Bill for 2021 has this clause.
Limitations of A Child Education Plan
A Child Education Plan first offers significant advantages, including life insurance protection, capital growth, and tax advantages in a single bundle. But a closer examination reveals certain restrictions that should be taken into account before selecting this kind of policy :
Low Life Cover
The life cover provided by Child Plans Unit Linked Insurance Plan is limited to ten times the yearly premium payable for the scheme. So for an annual premium of Rs. 50,000, the life cover provided by a Child Education Plan Unit Linked Insurance Plan will only be Rupees five lakh. This limit
life cover is almost like not having a life cover, and term plans provide a significantly higher covered at a fraction of the cost.
Diversion Of Premium Paid
Not all of the premium chargeable for a Child Education Plan gets invested. This is because a part of the premium is allocated towards providing life cover to the insured sperate. As the invested fund is lower than the actual premium chargeable and various charges are also deducted from the premium funds, the potential payout from Child Education Plans gets reduced.
Few Investment Choices
When choosing a Child ULIP, policyholders have few options for where their money will be invested. The Insurance Company offers only a few funds as supporting opportunities. Furthermore, the insurer, not the policyholder, chooses the asset classes in which the investments will be made in Child Endowment Plans. This limits policyholders’ options for determining how and which instruments will be used for investing.
Limited Flexibility
Child Education Plans are available with a 5-year withdrawal-free lock-in period. After the lock-in period, the policyholder can choose to give up the policy or keep the current arrangement. Furthermore, once the current Child Education Plan is in place, the terms of the policy, including the payment due, life insurance coverage, etc., cannot be changed. This restricts how flexible this insurance coverage can be.
Should You Invest In A Child Education Plan?
Due to the many restrictions placed on child education plans, most investors should choose an investment strategy and a term insurance plan separately. In this method, one can receive a lot of life insurance at a reasonable price and many more investing alternatives. Equity mutual funds are one type of investment that may be perfect for long-term financial objectives like funding a child’s school.
The Systematic Investing Plan (SIP) investment option for equity mutual funds can be a good substitute for child education plans. Parents might use SIP to make comparatively little deposits over an extended period to build enough money for their child’s higher education. Furthermore, compared to Child Education Plans, Equity Mutual Funds have a much better potential to provide returns that outpace inflation over investment periods of 7 years or longer. In addition to this, investors have the choice to periodically examine the performance of their assets and make appropriate modifications as needed without incurring any fees.
While some people may be tempted to choose a Child Plan only because of the tax advantages offered, it can be remembered that having adequate funds set up for a child’s higher education should come first. The achievement of the financial objective that is being sought through investment should always take precedence above tax benefits. However, ELSS Tax Saver Mutual Funds, which have a shorter lock-in term of 3 years compared to Child Education Plans, are an option for people looking for tax benefits.