A child education plan is intended to assist children in pursuing their educational goals in whatever field they desire. These plans include a life insurance component as well as opportunities to save money on premium payments. The one-time payment at the end of the policy period ensures that neither you nor your child will face financial difficulties when it comes to paying for higher education.
As parents, we always want the best for our children, especially in terms of education, and the steep rise in educational costs is a source of concern. As a result, many parents are looking for different investment options to help fund their children’s education, one of which is Child Education Plans.
Child Education Plans are insurance policies designed specifically for parents who want to help their children pay for their higher education. Children rely on adults to feed them and provide for their educational needs, among other things. A child should not be forced to struggle for funds to survive and receive basic care and education after the death of a parent. This is why, as a parent, you must have child insurance. Many financial planning companies assist in selecting apt educational plans for children.
More information on child education plans can be found below.
. How do child education plans function and what are they?
Insurance companies offer investment cum insurance policies called Child Education Plans or Child Plans. These are marketed as investments that allow parents to save for their children’s higher education expenses while also providing financial security to the child in the event of the parent’s untimely death.
A portion of the plan’s premiums is used to provide life insurance, while the rest is invested in equity or debt instruments to help save for the child’s higher education needs. The life insurance coverage is extended to the parent in the case of a Child Education Plan. When the child turns 18, the insurance plans mature, and the final payment is made
. Types of child education plans
Child ULIP Plans
A ULIP plan is a financial product that combines investment opportunities and life insurance into a single package. When you purchase a ULIP, you must pay monthly premiums. A part of the premium is used to cover the cost of life insurance. The rest, on the other hand, is put into either equity-oriented, debt-oriented, or a combination of the two investments, which can be used to pay for your child’s education, marriage, and other future expenses. As a policyholder, you must decide what and how much where to invest based on your financial obligations and risk profile.
The only distinction between a Child Education Plan ULIP and other ULIPs is the length of coverage. While standard ULIPs have policy terms ranging from 10 to 25 years, a Child Education Plan ULIP pays out when the child reaches the age of 18.
Child Endowment Plans
A child endowment insurance policy is a type of life insurance that combines life insurance and savings into a single policy. It allows policyholders to customize the sum assured to meet their specific needs and financial objectives.
The sum assured in a child endowment policy is a guaranteed payment upon the death of the parents or when the child reaches the maturity age. In addition, the endowment plans pay out bonuses on a regular basis.
After the child reaches the age of 18, these plans typically make four payouts totaling 25% of the sum assured plus any applicable bonuses. This type of Child Policy has a low level of risk due to guaranteed returns. However, the returns on these schemes are frequently low.
Key features of child education plans
- Coverage for Life Insurance
Life insurance is included in Child Education Plan, with a sum assured of up to 10 times the annual premium paid. The Insurance Regulatory and Development Authority of India, India’s insurance industry regulator, established this life cover limit (IRDAI).
- Alternatives to Investing
Policyholders in Child Endowment Plans do not have the option of investing in specific asset classes. Insurance companies make investment decisions on behalf of policyholders. Child ULIP Plans, on the other hand, give policyholders some control over how their money is invested.
- Period of confinement
Both types of Child Education Plans that are currently available in India have a 5-year lock-in period. In most Child Plans, partial withdrawal is permitted beginning in the sixth year. After the 5-year lock-in period has expired, the policyholder may choose to surrender the policy and withdraw all investments.
- Tax advantages
Premiums paid to keep the child policy in effect are tax-deductible under Section 80C due to the life insurance component. The payouts from these plans are tax-free if the annual premium paid is less than Rs. 2.5 lakh.
Limitations of a child education plan
- Coverage of Low Life
The amount of life insurance provided by Child Plans is capped at 10 times the annual premium. This limited life insurance is almost as good as having none at all, and term plans provide significantly more coverage for a fraction of the price.
- Premiums are being diverted.
The price paid for a Child Education Plan is not entirely invested. This is because a portion of the premium is used to provide life insurance to the insured person. The potential payout from Child Education Plans is reduced because the invested amount is less than the actual premium paid, and various charges are also deducted from premium payments.
- Investing Options are Limited
When choosing a Child ULIP, policyholders have limited options for where their money is invested. The Insurance Company’s investment options are limited to a small number of funds. This limits policyholders’ options when it comes to how and in which instruments their investments will be made.
- Flexibility is limited
Child Education Plans have a 5-year lock-in period during which no withdrawals are permitted. Once in effect, the existing Child Education Plan cannot be changed. This limits the insurance policies’ flexibility.
Should you invest in a child education plan?
Because of the various limitations of Child Education Plan, most investors would be better off choosing an investment and a term insurance plan separately. This provides substantial life insurance at a low cost, as well as a much wider range of investment options. Equity mutual funds are one option that can be ideal for long-term financial goals such as a child’s education.
While some people may be tempted to choose a Child Plan because of the tax benefits, it is important to remember that saving enough money for children’s higher education should come first. Tax advantages should never take precedence over achieving the financial goal that the investment is designed to achieve.
Conclusion:
A child education plan is designed to help children achieve their educational objectives. There is a life insurance component to the plans, as well as ways to save money on premium payments. Child Education Plans, or Child Plans, are investment cum insurance contracts offered by insurance companies.
Child Education Plans offer life insurance with an amount assured of up to 10 times the annual premium paid. Child endowment plans typically make four payouts totaling 25% of the sum assured, plus any incentives that may be eligible. Plan features for children’s schooling
The payment from these plans is tax-free as long as the annual premium paid is less than Rs. 2.5 lakh. Most investors would be better suited to picking their investment and term insurance independently.
