Your money: Why your child education plan may not be enough | The Financial Express

Your money: Why your child education plan may not be enough

Check whether the returns are keeping pace with inflation

Your money: Why your child education plan may not be enough
An important aspect of these policies is the lock-in period. Usually these policies have a lock-in period of five years.

By Vikas Madhukar and Rishi Manrai

With the increasing cost of higher education in India, it is very important for parents to plan their child’s education. Innovative financial instruments like child insurance-cum-investment plans not only shield the guardian in case of untimely death but also help them plan their child education expenses keeping in mind the rate of inflation.

These financial instruments utilise a part of the premium paid by the customer in providing risk cover while majority of the premium is invested in various debt and equity instruments. Most of these plans have a lock-in period till the child turns 18 years.

Select with care

While scouting for a suitable child plan, parents must look at both the features of child education support and life cover. Child education plans like unit-linked insurance plans (Ulips) consider the policy holder’s choice (in funds) while investing in the market. These choices of funds are a judicious mix of equity, debt and hybrid funds and will naturally incur higher costs.

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On the contrary, child endowment plans do not offer such flexibility and typically invest in fixed income sources of investment like debt, bonds and debentures. But the flip side of these policies is that they offer guaranteed returns including life insurance. Once the child turns 18, these plans normally start making four pay-outs that are each equivalent to 25% of the sum assured plus any relevant incentives.

Look at lock-in period

An important aspect of these policies is the lock-in period. Usually these policies have a lock-in period of five years. The policy holder can partially withdraw the sum invested in the sixth year of the policy or can even surrender the policy in case he changes the plan of his/her child education.

The child plan’s premium is eligible for a tax credit under Section 80C because of the life insurance component. The maximum tax saving available is Rs 1.5 lakh under Section 80C, which also applies to other tax-saving vehicles such as ELSS, Public Provident Fund, etc. As long as the annual premium paid is less than Rs 2.5 lakh annually, the payment from these plans is tax-free. However, the pay-out received is subjected to capital gains tax.

A child education plan, on the face of it, seems to offer a number of favourable benefits, including tax benefits, life insurance protection, and capital growth all in one package. However, a closer look reveals a number of limitations.

The first and the foremost limitation is that the maximum amount of life insurance provided by a child plan is 10 times the annual premium. A small amount of life insurance is equivalent to having no life insurance at all, since term policies offer significantly more protection for a fraction of the cost.

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The second limitation is that the premium paid in a child education plan is not fully invested in markets. So, in order to get the maximum advantage one should buy insurance and investment separately.

Madhukar is pro vice-chancellor, Amity University, Gurugram and Manrai is assistant professor, Amity Business School, Gurugram

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First published on: 23-11-2022 at 00:45 IST