According to the BankBazaar Aspiration Index, education inflation in India is 10-11%, which is higher than the normal inflation rate. When planning for their children’s education expenses, most parents end up purchasing a child insurance plan that combines investment and insurance. Child insurance plans are designed to protect children’s financial future by providing funding for major needs such as higher education. They also provide tax benefits under Section 80C of the Income Tax Act, 1961.

Types of child insurance plans

Essentially, there are two types of child insurance plans:

• Investment Linked Insurance Plan (ULIP)
• Pension and child insurance policy

ULIP invests a portion of the premium in market-linked instruments and provides returns based on market performance. Endowment policies are traditional plans that offer guaranteed returns with lower risks than ULIPs. So, in an endowment policy, the returns are guaranteed, whereas in a ULIP, they are market-linked. However, in both cases, the sum assured is guaranteed on the death of the policyholder or on maturity of the policy.

For example, XYZ Insurance: In the unfortunate event of the death of a parent, these plans ensure that the financial needs of the children are met through life insurance and accumulated savings. An important aspect is the Waiver of Future Premiums, where if the policyholder dies, future premiums will be waived but the policy remains in effect, ensuring that the child’s financial goals are still achieved.

ground reality

When investing in your child’s future, you hope to get a good return on your investment, but the reality is different. In an endowment plan, the rate of return is guaranteed, but usually below average inflation (not even regular inflation, forget about education inflation). Returns are not guaranteed.

Most promotional materials about these policies never clearly state the returns. These documents often provide estimated amounts due in relation to various premium payment scenarios, which creates uncertainty for the policyholder and the insurance company is betting on the regularity of your payments. The documents always show time-weighted returns, while policyholders actually receive money-weighted returns. The difference between the two is the actual return and the return generated after fees and expenses. Therefore, it is important to verify the exact IRR of the program with your contact person.

Alternatives and Conclusions

If you want to secure your child’s future and protect him or her from any unforeseen events, some other investment options may make more sense.

It may be helpful to separate your investments through a term plan and invest in mutual funds and stocks. A term insurance policy will provide high coverage at a low premium, thereby ensuring financial security for your children without breaking the bank on investment. Moreover, investing in stocks and mutual funds separately can provide you with higher returns.

However, the main advantage of a child plan is that it does not create any tax burden. If you manage both insurance and mutual funds, you’ll face tax obligations every time you change your investment portfolio. Often, this is a key point brought up by children’s planning attorneys.

However, it is important to seek professional guidance when investing in major instruments and making major decisions to increase tax efficiency and ensure higher returns.

Hope this helps, thanks.

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