Child education plans can help parents prepare financially for future education expenses. Explore their key features, benefits, structure, costs and important financial planning considerations to build a suitable education fund for your child.

What are child education plans?

Child education plans are financial instruments that enable parents to create a corpus for their children’s future educational expenses and milestones. The plans allow the policyholder to make regular contributions over a certain period until the maturity date, which could be in 5, 10, 15, or 20 years on the basis of a child’s age.

Moreover, in India, child plans offered by life insurers may come with benefits of life insurance coverage along with savings or investment plans. Parents should consider market-linked options such as ULIPs and guaranteed products on the basis of their financial needs.

The key benefit of a child plan is goal-based savings and investment over a long period of time. By starting early, the financial burden of education can be easily managed as the contribution period is spread out across several years. Moreover, the money saved can reduce the burden of rising costs of higher education and other expensive milestones.

Additionally, the child plan can also provide life insurance coverage in case the parent or policyholder dies before the maturity of the policy. Depending on the terms of the policy, the life insurer covers the death benefit of the policyholder, waives the premium, and keeps the policy active for the child. These terms differ from one insurance company to another. Therefore, it is essential to go through the policy document before purchasing a child plan.

How does a child education plan work?

1. Decide on the required corpus

The first step to purchasing a child plan is to identify how much money the parent wants to raise for their child’s future educational milestones. The parent must consider their child’s educational goals and milestones, including the already existing assets, investments, and insurance coverage. The parents may also identify how much it does cost them today to send their child to school or college and how much that cost is going to increase over time.

Also, the parent must identify how much money can be set aside for the child plan without putting a strain on their daily living expenses. Parents can use a child future planning calculator to get an accurate estimation of their required corpus for the child plan. A Child education planner can also help parents assess their long-term education goals and align their savings with the expected financial requirements.

2. Decide on participating or non-participating plans

Traditional child insurance plans come with two options: participating and non-participating.

Participating plans provide participating bonuses in addition to the benefits stated in the policy. However, the bonus is subject to the declaration of the insurer and the terms and conditions of the policy. On the other hand, non-participating plans make the benefits payable as mentioned in the policy. Therefore, non-participating plans do not provide any additional bonuses. The choice between the two depends on an individual’s financial needs, the benefits one wants at maturity, and the participation feature.

3. Decide on plan options

Every child plan offers different premium and maturity benefits. Therefore, it is essential to consider the following features:

A. Premium payment options

The child plan allows the policyholder to make monthly, quarterly, half-yearly, or yearly premium payments. Some of the child plans also give an option to pay the premium as a single payment. Depending on the financial stability of the parent, one can choose between these options. For instance, a self-employed parent with an inconsistent income stream finds it difficult to make monthly premium payments as compared to a parent with a regular salary.

B. Limited pay option

This option enables the policyholder to make premium payments for a certain number of years as compared to the policy term. For instance, if a parent buys a 20-year child plan, the parent can choose to pay the premium for 10 years. Thereafter, the policy matures for the remaining 10 years, depending on the terms and conditions of the child plan.

C. Payout options

The maturity benefits can be claimed in a number of ways, depending on the terms and conditions of the policy. Some of the payout options include:

  1. Periodic payouts: The parent receives a certain amount of money at regular intervals during the benefit period.
  2. Lump-sum maturity benefit: This option provides a one-time payout upon maturity of the policy along with any bonuses applicable to the child plan.
  3. Combination payout: This option combines periodic payouts and lump-sum maturity benefit. Every insurer offers different payout options, with varying amounts and intervals. Therefore, it is essential to consider the terms and conditions of the payout before purchasing a child plan.

D. Riders

Riders are additional coverage options that one can add on to the base plan by paying an additional rider premium. Some of the common riders include accidental death benefit rider, accidental disability rider, critical illness rider, hospitalization or surgery rider, and waiver of premium rider. Every child plan offers different riders. Moreover, every rider comes with benefits, exclusions, eligibility criteria, and terms and conditions.

4. Pay the premium and complete underwriting

The premium amount in a child plan depends on various factors, including the age of the policyholder and the child, sum assured or applicable benefit, policy term, payment term, additional riders, and type of plan. By submitting the filled proposal form, documents, and premium, the parent can complete the underwriting process. It is essential to go through the terms and conditions of the child plan before purchasing it.

Depending on the child plan, the insurer may ask for additional documents or a medical examination. Once the underwriting process is completed, the insurer approves the child plan on the basis of the submitted proposals. If approved, the insurer issues the policy as per the terms and conditions.

5. Keep the policy active

It is essential for the policyholder to keep the policy active by making timely premium payments. In case the policyholder fails to make premium payments within the grace period, the benefits of the policy lapse or are subject to other terms and conditions as specified in the child plan document. Therefore, it is essential to keep track of premium payments by setting a standing instruction or auto-debit facility with the bank in order to avoid missing out on premium payments.

How does a child plan provide benefits?

A. Periodic benefits

The child plan provides benefits in instalments for certain milestones as per the terms and conditions of the policy.

B. Maturity benefit

Upon maturity, the policyholder or the nominee receives the maturity benefit as stated in the child plan. Additionally, the participating child plans also provide participating bonuses upon maturity, subject to the terms and conditions.

C. Death benefit

The death benefit is one of the most important benefits of a child plan. In case of the death of the policyholder, the insurance company pays the death benefit to the nominee or the legal guardian of the child, depending on the terms and conditions of the policy. In some cases, the child plan comes with a waiver of premium benefit. As a result, in case of the death of the policyholder, the future premiums of the child plan are waived off, and the policy continues to provide its benefits.

On the other hand, if the nominee is a minor, the insurer pays the maturity benefit to the legal guardian or the nominee as per the terms and conditions and applicable laws until the minor reaches a certain age.

Conclusion

A child education plan enables a parent to start building a corpus for their child’s future educational milestones. By investing early, a parent can spread out their contributions over a longer period of time, thus reducing their financial burden. In addition to the corpus-building benefit, some of the child plans provide life insurance coverage and/or market-linked investment options. However, before purchasing a child plan, it is essential to consider the policy term, premium term, benefits, exclusions, charges, liquidity, and associated risks. Parents can also consider the financial needs of the child’s future educational milestones. A proper financial planning strategy with an appropriate insurance cover helps a parent reach their financial goals with ease.