Child plans sold by life insurance companies are a combination of insurance and investment to help create a corpus over a period of time.
Child plans sold by life insurance companies are a combination of insurance and investment to help create a corpus over a period of time. On maturity of the policy, the insurance company will pay a lump sum amount which can be used for the child’s higher education or marriage expenses. Apart from tax deduction under Section 80C of the Income Tax Act on the premium paid, maturity benefits are also exempt from tax as per Section 10(10D) of the Act.
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Child plans are either traditional policies or unit linked insurance plans. Insurers offer certain riders with child plans such as accidental death and disability benefits. Before buying a child plan, check if the plan has a premium waiver feature in case of death of the policyholder.
In case the policyholder dies during the term of the policy, the child or a nominee will receive the entire death benefit. These plans also offer partial withdrawal facility in case of any urgent financial requirement such as medical treatment.
With increasing cost of higher education, it is better to buy such a policy with a tenure of 15–25 years when the child is very young, so that you get to build a sizable corpus for the child’s financial needs. The parent can avail an education loan by using the policy as a collateral.
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Low returns
However, returns from these policies are just 5-6%. Ideally, a parent should buy a term plan to ensure the family’s financial security. Term plans are cost efficient as compared with traditional insurance policies or even unit-linked insurance plans.
In case you plan to surrender the policy, the surrender value will be very low and you will lose a major part of the premiums paid over the years. Moreover, the insurance cover is very less in case of child plans. To create a corpus for higher education, it is better to invest in diversified equity mutual funds, Public Provident Fund and for a girl child, Sukanya Samriddhi Yojana.
