Recently, Ajay overheard a colleague claim that he was spending more on his son’s school fees every year than his annual fees at IIT Kharagpur. At first, Ajay thought his colleague was exaggerating, but he wasn’t sure, so he decided to check whether it was true. He was shocked to find that his neighborhood school was charging primary school students around Rs. 30,000 as regular fees every quarter, and development charges were an additional Rs. 25,000 every year. Ajay realized that his colleague was not exaggerating as his semester fees at the B.Tech program of BIT Mesra were around Rs. 35,000 in 2009. He was now worried about what higher education fees would be like when his 2-year old son started college in about 16 years.
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, and one popular option is Child Education Plans. Child Education Plans are insurance policies specifically targeted at parents seeking to fund their child’s higher education expenses. Over the years, rising higher education costs have fueled the interest of parents in these policies.
In this blog, we will discuss what Child Education Plans are, their types and features, as well as 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 or Child Plans are investment cum insurance policies provided by insurance companies. These are marketed as investments that allow parents to save for their children’s higher education expenses over the policy term while additionally providing financial security to the child in case of the parent’s untimely death.
A portion of the premiums paid for the plan is used to provide life cover, while the remainder is invested in Equity or Debt instruments to help save for the higher education requirements of the child. In the case of a Child Education Plan, the life insurance coverage is extended to the parent. These insurance plans mature, and the final payout occurs when the child turns 18.
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.
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. The below table illustrates the key charges for two currently available Child Education Plans offered by ICICI Prudential Life Insurance and SBI Life:
| Type of Charge | SBI Smart Scholar | ICICI Prudential Smart Kid Solution |
| Premium Allocation Charge | Up to 6% p.a. | Up to 6% p.a. |
| Policy Administration Charge | Rs. 50 to Rs. 500 per month | Upto Rs. 500 per month |
| Fund Management Charge | 0.35% to 1.35% p.a. | 0.75% to 1.35% p.a. |
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.
Limitations of A Child Education Plan
At first glance, a Child Education Plan seems to provide key benefits such as life insurance cover, growth of capital as well as tax benefits in a single package. But a closer look reveals a number of limitations that one needs to consider before choosing this type of policy:
Low Life Cover
The life cover provided by Child Plans is limited to 10 times the annual premium payable for the scheme. So for an annual premium of Rs. 50,000 the life cover offered by a Child Education Plan will only be Rs. 5 lakh. This limited life cover is almost like not having a life cover at all, and term plans offer a significantly higher cover at a fraction of the cost.
Diversion Of Premium Paid
Not all of the premium paid for a Child Education Plan actually gets invested. This is because a portion of the premium is allocated towards providing life cover to the insured individual. As the invested amount is lower than the actual premium paid and various charges are also deducted from the premium payments, the potential payout from Child Education Plans gets reduced.
Few Investment Choices
Policyholders have limited options regarding where their money gets invested when they opt for a Child ULIP. The investment choices are limited to a small number of funds offered by the Insurance Company. Moreover, in the case of Child Endowment Plans, it is the insurer and not the policyholder who decides the asset classes where the investments will be made. This restricts the choice of policyholders when it comes to selecting how and in which instruments the investments will be made.
Limited Flexibility
Child Education Plans are offered with a lock-in of 5 years during which no withdrawals can be made. Subsequent to completion of the lock-in, the policyholder has the option to either surrender the policy or continue with the existing plan. Moreover, the terms of the policy, such as premium payable, life cover, etc. of the existing Child Education Plan cannot be altered once the plan is in effect. This limits the flexibility of these insurance policies.
Should You Invest In A Child Education Plan?
As a result of the various limitations of Child Education Plans, it is more appropriate for most investors to opt for investment and a term insurance plan separately. This way, one can get substantial life cover at a low cost along with a significantly wider range of investment options. One investment option that can be ideal for long-term financial goals such as a child’s education is Equity Mutual Funds.
Opting for Equity Mutual Fund investments via the Systematic Investment Plan (SIP) route can be a viable alternative to Child Education Plans. Using SIP, parents can make relatively small investments over the long term to accumulate sufficient funds for their child’s higher education. What’s more, over an investment tenure of 7 years or longer, the potential of Equity Mutual Funds to deliver inflation-beating returns is significantly higher than that of Child Education Plans. Apart from this, investors also have the option to review the performance of their investments periodically and make appropriate changes as necessary without any penalties.
While some might be inclined to opt for a Child Plan simply because of the tax benefits on offer, it must be kept in mind that ensuring that one has enough funds for children’s higher education should be the priority. Tax benefits should never take precedence over reaching the financial goal that is being targeted through an investment. However, those seeking tax benefits can opt for ELSS Tax Saver Mutual Funds, which have a shorter lock-in period of 3 years as compared to Child Education Plans.
