As parents, we always want our children to have the best of everything, especially education, and the steep rise in the cost of education is a source of concern. This has led many parents to seek out various investment options to fund their children’s education. 

One of the popular investment options in India is Child Education Plans. These plans are designed to provide financial support to fund your child’s higher education expenses. 

In this blog, we will discuss what Child Education Plans are, their types and features, and whether they are a good option to fund your child’s higher education expenses.

What Are Child Education Plans And How Do They Work?

Child Education Plans are investment products that aim to fund your children’s education. They are long-term investments that allow you to save for your children’s higher education expenses over the policy term. 

Under this plan, you have to pay periodic premiums, which can be monthly, quarterly, half-yearly, or annually over the policy term. In return, the insurance provider gives a lumpsum amount at maturity. The maturity amount can be paid in lumpsum when your child reaches a particular age level, or periodic payouts can be made at different stages of education or age.  This depends on the type of plan you are investing in.

Types Of Child Education Plans

Child Plans can be classified into 2 different categories based on the type of payout being offered. These are: 

  1.  Child ULIP Plans

These Child Education Plans provide a lumpsum payout at the end of the policy term. While the maturity proceeds of these plans can be used for any purpose, the primary goal is to provide funds for higher education expenses of the child for whom the plan is purchased. 

Child ULIPs invest in Equity and Debt securities similar to other Unit Linked Insurance Plans (ULIPs). The only difference between a Child Education Plan ULIP vs. other ULIPs is in the tenure offered. While standard ULIPs are offered with policy terms ranging from 10 years to 25 years, the payout of a Child Education Plan ULIP occurs when the child turns 18.        

  2.  Child Endowment Plans

This type of Child Education Plan provides life insurance cover and guaranteed returns. These plans typically make 4 payouts equal to 25% of the sum assured plus applicable bonuses starting after the child reaches 18 years of age. Due to guaranteed returns, this type of Child Policy features a low degree of risk. However, returns offered by these schemes are often relatively low. 

  3.  Moneyback Insurance Plans

Children’s moneyback insurance plans are similar to endowment plans, but they come with regular returns at periodic intervals. Typically, returns are given at a percentage of the sum assured amount at 5 or 10-year intervals.  

This type of insurance plan aims to provide the dual benefit of both endowment and moneyback policy to cover the children’s education expenses. As you receive regular returns, and apart from this, you also receive the maturity amount when the policy matures. 

Key Features Of Child Education Plans

• Life Insurance Cover 

Child Education Plans have life insurance cover built into it, and the sum assured is up to 10 times the annual premium paid. This life cover limit is as per the guidelines provided by India’s insurance industry regulator, the Insurance Regulatory and Development Authority of India (IRDAI). So the life cover limit for a Child Plan with an annual premium of Rs. 50,000 will be Rs. 5 lakh.  

• Investment Options

In the case of Child Endowment Plans, policyholders have no scope to select specific asset classes to invest in. Insurance companies automatically choose the investment on behalf of policyholders, and these are typically Debt investments such as Government Bonds, Corporate Bonds, Treasury Bills, etc.

On the other hand, Child ULIP Plans offer some choice to policyholders regarding where the money will be invested. However, the number of funds to choose from is limited to the list of funds managed by the Insurer. For example, the SBI Smart Scholar allows the policyholder to choose from a list of 9 funds, while ICICI Smart Kid Solution offers 13 fund options across Equity, Debt, and Hybrid Fund categories.      

• Lock-in Period

Both types of Child Education Plans currently offered in India are currently offered with a lock-in period of 5 years. From the 6th year onwards, partial withdrawal is allowed in the case of most Child Plans. The policyholder may also decide to surrender the policy and withdraw all investments after the 5-year lock-in is completed.  

• Charges

Child Education Plans have various charges that need to be paid by the policyholder. These include fund management charges, premium allocation charges, policy administration charges, etc. 

• Tax Benefits

Because of the life insurance component, premiums paid to keep the child policy in effect provide tax deduction benefits under Section 80C. However, there is a maximum limit of Rs. 1.5 lakh u/s 80C in total, which includes other popular tax-saving instruments such as Tax Saver ELSS Mutual Funds, Public Provident Fund (PPF), Employees’ Provident Fund (EPF), Life Insurance Plans, etc. 

The payout obtained from these plans is tax-free as long as the annual premium paid is less than Rs. 2.5 lakh annually. If the annual premium paid exceeds Rs. 2.5 lakh, the payout received will be subject to applicable Capital Gains taxation rules. This provision has been introduced in the Finance Bill, 2021.    

Insurance-based Child Education Plans

Insurance-based child education plans are normal children education plans that helps in funding your child’s education, but also offer you the insurance coverage as well.  It gives your child a good corpus on maturity. In case of your unfortunate death between the policy term,  it provides a lump sum amount, and the premium amount is also waived.  Here are some of the key features of the plan: 

• Tenure: Generally, insurance-based child education plans are offered for the long term. It can range between 10 to 25 years or more.

• Eligibility: Parents can purchase these plans for their children. The minimum and maximum age of children varies with plan. Typically, the plan can be purchased after a few months of the birth of a child. 

• Maturity: Mature as per the chosen plan or when the child reaches a particular age. The maturity amount can be paid as lumpsum on maturity, or periodic payments can be made at different stages of education or age.

• Tax Benefit:  Child education insurance plans are eligible for tax benefits of upto Rs 1.5 lakh under Section 80C. Also, maturity proceeds are tax-free. 

• Return: The returns can vary based on the underlying investments, including fixed-interest instruments, equities, or a mix of both.

• Investment Amount: The investment amount varies with the type of plan you are opting for and the insurance coverage. 

• SIP: Under this plan, you must pay a regular premium on a quarterly, half-yearly or annual basis.  Some plans also come with monthly payment options such as SIP, making saving and investing in your child’s future convenient.

Fund-based Child Education Plans

Fund-based child education plans are the mutual fund schemes that are offered by the mutual fund companies. As the name suggests, it is positioned as a solution for children’s education expenses. It primarily invests in equity and debt-related instruments. Here are the features of fund-based child education plans: 

• Tenure: It comes with a lock-in period of five years or till the child attains the age of majority, i.e., 18 years, whichever is earlier. 

• Eligibility: Anyone who satisfies the basic KYC requirements can invest in children’s funds. 

• Maturity: At maturity, you can redeem your units and receive the maturity corpus as per the latest NAV as of the maturity date. 

• Tax Benefit: These funds are taxed similarly to other mutual funds. If the scheme is debt-oriented, then LTCG and STCG are taxed as per the slab rates. However, if it is equity-oriented, then STCG is taxed at 15%, and LTCG above Rs 1 lakh is taxed at 10%. 

• Return: Returns are linked with the performance of underlying securities such as equity or debt. Hence, you earn a market-linked return. 

• Investment amount:  This fund has no investment limit; you can start your investment as low as Rs 1,000 or even lower. 

• SIP: You can invest in this fund via SIP (Systematic Investment Plan), which can be either daily, weekly, monthly, or quarterly.

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