What Is a Child Education Plan?
A child education plan refers to a financial instrument that aims at accumulating a predetermined corpus when the child reaches a point where he/she requires higher education funding. This type of financial plan incorporates two key elements, including financial protection and wealth accumulation, making it an effective child saving plan for long-term financial goals.
Financial protection refers to the ability to ensure continuity of funding even if the parent dies before achieving the goal of funding a college or university education for his/her child. This can happen in two scenarios:
- When the insurer continues paying the future premiums after the parent’s demise
- The insurer pays a lump sum in the form of insurance money
On the other hand, wealth accumulation involves systematic investing in a financial instrument or several instruments aimed at generating adequate returns for funding the child’s education.
Context of India
Child education plans in India are life insurance products regulated by the IRDAI. The primary purposes of such plans include:
- Creation of a separate corpus fund
- Providing life insurance cover
Depending on their nature and design, such products offer different benefits such as:
- Guaranteed and bonus returns (conventional plans)
- Returns based on market performance (ULIP-based plans)
They differ from mutual funds or loan facilities in that they come with features such as surrender value, lock-in period, etc., which make them more disciplined as well as protective.
Advantages of Investing in the Best Child Education Plan
Financial Protection for Your Child
Financial protection offered by these plans is a major advantage for any parent. In case of the sudden loss of a parent, there are guarantees that the child won’t fail to achieve his/her educational goals, as follows:
- Future premiums would continue to be paid by the insurer
- Alternatively, a lump sum payment would be made to finance the child’s education
Creation of Wealth Over the Long Term
If the plans are linked with the markets, they involve investments in equity markets, which help in creating wealth for the parents as follows:
- Over the long term, a compounded rate of return would result in a significant increase in the accumulated corpus
- Equity investments can keep the rate of return above inflation, helping in meeting future education costs
Tax Advantage
Such products are relatively tax-efficient because:[s1]
- Premiums paid are deductible under Section 80C
- Income received upon maturity may qualify for exemption under Section 80CCD
This combination offers the advantages of wealth creation and tax efficiency to investors.
Optional Riders
Optional riders offered by such plans are as follows:
- Accidental death rider
- Disability rider
- Critical illness rider
These are additional features that enhance protection.
Facility of Using as Collateral for Loan Facility
Parents can use the accumulated corpus as security for obtaining loans for their children’s educational expenses.
Characteristics of the Best Child Plans Available in India
Availability of Suitable Long-Term Investments
The most appropriate characteristic of a good child plan is the availability of investment opportunities that suit individual situations, depending on:
- Remaining duration of the education objective
- Options for investing in equity or debt instruments
Goal Protection Feature
This refers to the provision for payment of the total investment amount upon the occurrence of insured events such as the parent’s death. It is characterized by:
- Lump sum payment in case of death of the insured person
- Cancellation of future premium payments
- Investments continuing as per usual terms
- The child receiving the full intended corpus upon maturity of the contract
Automatic Risk Management Strategy
Management of long-term investments involves several risks that require strategies such as:
- Systematic Transfer Option (STO): Funds are transferred systematically to equity for averaging the risk of fluctuation in the equity markets
- Automatic Rebalancing: Maintaining a target equity/debt ratio in the portfolio
- [s2] Safety Switch: Transferring funds from equity to debt in order to protect gains achieved from equity investments
Facility for Partial Withdrawal
This refers to the ability to withdraw partial amounts during the term of the contract. Such withdrawals would be free of tax obligations.
Cost Efficiency
The cost of operating child education plans should be competitive. Cost aspects would depend on factors such as the age and health of the insured person.
How to Select the Best Child Education Plan?
Premium Payment, Tenure, and Flexibility
The duration required for achieving a specific child education goal falls between 12 and 18 years. The best child education plan should have characteristics such as:
- Ability to pay premiums regularly over the period
- Flexibility to adjust to changing incomes
- Rigidity in plan payments should be avoided
Education Inflation Factor
In India, the education inflation rate is estimated to be between 8% and 10% annually. This is usually higher than the general inflation level.
- Low-return investment instruments such as fixed deposits and savings accounts cannot meet this requirement
- Equity-oriented investments would be a better choice for long-term investment horizons
- It is necessary to differentiate between the general CPI-based education inflation rate and actual fee inflation rates, especially for overseas study programs
- The latter usually exceeds the former by significant margins
Matching Investment Strategy with Risk
An important issue in selecting investment strategies for children’s education is determining:
- Remaining time period for achieving the financial goal
- Risk tolerance levels
General guidelines for selection include:
- More than 10 years horizon → Higher proportion of equity investments
- Medium horizon → Balanced portfolio
- Shorter horizon → Debt-based portfolio
Alternative investment avenues include:
- Public Provident Fund (PPF)
- Sukanya Samriddhi Yojana (SSY): Applicable to girls
Conclusion
As discussed above, a child education plan is a financial vehicle that incorporates wealth creation and insurance features to protect children’s education goals. Effective selection of an appropriate investment vehicle is essential for achieving this objective successfully.
[s1]recheck
[s2]These features exist only in some ULIPs. Not universal across all child education plans
recheck
