Synopsis: This article explains why early planning for children’s education is important, what child insurance is, types, factors to consider before buying a child insurance and the top 3 child insurance policies available in the market.
Growing expenses for education make early financial planning important for every parent in India. With education inflation growing at a faster rate than the general inflation, depending on savings can put both your child’s aspirations and your family’s financial security at risk.
Why Planning Early for Your Child’s Education Is Crucial
In fast growing economy like India, planning for children’s education is no longer an option but a necessity. The following factors are the major reasons behind this urgency.
- Education Inflation: According to recent data, the cost of children’s education in India has been rising at 10-12% per annum, outpacing the general inflation. Other than the school fees, expenses like tuition fees, coaching classes, study materials, accommodation etc are also rising significantly every year. It has been observed that the education costs double every 6-7 years.
- Risks of Last-Minute Planning: Rushed, last-minute planning often ends up compromising either the quality of education or the family finances. Lack of adequate planning forces parents to dip into their retirement savings or long-term investments, threatening the financial security of the family.
- Tax Benefits: Under Section 80E of the Income Tax Act, 1961, individual taxpayers can claim tax benefits on the interest amount of an education loan. This can be claimed for up to 8 years from the date the interest repayment started.
What Is Child Education Insurance?
Child education insurance is designed to help parents build a fund specifically for their child’s future education to ensure financial protection against future uncertainties. The parent is the policyholder, and the child is the beneficiary.
Types of Child Education Insurance Plans
- Guaranteed Returns Child Insurance Plans: Suitable for Parents with low risk tolerance who need guaranteed returns while protecting the capital amount.
- Unit Linked Child Plans (ULIPs): Ideal for parents with a long investment horizon and high risk tolerance, as the returns are market-linked. It also offers flexibility to switch between funds based on market cycles.
Factors to Consider Before Choosing a Child’s Education Plan
- Child’s Age: Your child’s present age determines your investment horizon to build an education corpus. So, the younger the child, the longer the investment horizon would be, and the lower the premium too.
- Educational Goals and Costs: Specifying future educational goals, such as whether higher education will be pursued in India or abroad, and the kind of course planning to pursue, and their estimated inflation-adjusted costs, will help in choosing the right policy.
- Risk Appetite: While parents with low risk tolerance might prefer policies with guaranteed returns, parents with higher risk tolerance might go for market-linked policies like ULIPs. Choose the policy that aligns with your risk appetite.
- Insurer: Ensure the credibility of the insurer by checking their financials, reputation, and track record. Also, check the claim settlement ratio to get an idea about insurer’s ability in fulfilling the claims by policyholders.
Top 3 Child Insurance Options and Their Features
1. ICICI Pru Smart Kid ULIP
- Type: ULIP
- Claim Settlement Ratio: 99.3% (ratio of all the schemes)
- Min Investment: 30,000 p.a onwards
- Withdrawals: Unlimited free withdrawals available after a 5-year lock-in period
- Life Cover: Included
- Premium Waiver: Insurer will pay the remaining premium if the parent dies.
- Fund Switches: Available
- Maturity Protect: The invested amount will be fully returned if the value of the fund goes below the invested amount.
Also Read: How Tier-2 and Tier-3 Cities Are Driving India’s Insurance Market Growth: What Reports Say
2. HDFC Life YoungStar Udaan
- Type: Guaranteed Returns
- Claim Settlement Ratio: 99.68% (ratio of all the schemes)
- Flexible: Policyholders can choose the term, premium and income.
- Life Cover: Available
- Illness Cover: Covers expenses incurred on the critical illness of the child upon paying an additional premium.
- Achievements: Rewards for the child’s academic achievements, such as getting into a top university.
3. SBI Smart Scholar Plus
- Type: ULIP
- Claim Settlement Ratio: 98.83% (ratio of all the schemes)
- Withdrawals: Partial withdrawals are available from the 6th policy year
- Life Cover: Available
- Premium Waiver: Available upon eventuality
- Fund Switches: 10 fund options available
- Loyalty Additions: Extra value added to boost your fund if the policy stays active.
How Much Should You Invest in Your Child’s Education?
Let’s consider the current cost for higher education is ₹15 lakh, while the child’s age is 3 years. Parents can easily go for a 15-year investment horizon, which is till the child turns 18 years of age. Assuming the education cost inflation is 10% p.a., the projected cost after 15 years would be around ₹63 lakh.
- Case 1: Start Early: With an investment horizon of 15 years, a monthly investment of ₹10,000 would be enough to meet the corpus requirement
- Case 2: Start Late: If started late, let’s say with an investment horizon of only 8 years, a monthly investment of ₹22,000 or more might be required to meet the corpus goal. Therefore, the earlier you start investing to build the education corpus, the better.
Conclusion
Even if life takes an unexpected turn, funds will still be available for your children’s education through these insurance policies. Depending on the uncertainty tolerance of an individual, one might choose guaranteed or market-linked returns. These setups link savings and safety into a single framework meant to support learning milestones. In the end, the right insurance policy depends on the educational goals of the child and the financial goals of the family.
Written by Nila Maria Jacob
