Myths vs Reality: The Truth about Child Plans

In India, where the cost of education is steadily climbing, this aspiration comes with a hefty price tag. With expenses ranging from Rs 5 lakhs to 30 lakhs for domestic education and a minimum of Rs 25 lakhs for studies abroad, the financial burden on parents is substantial. Considering even the conservative estimates of education inflation suggest that in 15-20 years, the cost of education could soar four to sixfold from current levels.

The stark reality is that relying solely on traditional financial instruments such as fixed deposits may prove insufficient in meeting these future educational expenses. Therefore, overnight accumulation of such substantial sums is simply unattainable for most families.

Recognising this pressing need, numerous banks and financial institutions have introduced long-term investment plans tailored specifically to building an education corpus for children. These child plans aim to alleviate the financial strain on parents while ensuring that their children have access to quality education.

However, whether these child plans really help parents accumulate the required corpus is questionable. In this article, we delve into the myths vs realities surrounding child plans. By dispelling misconceptions and shedding light on the true potential of child plans, we aim to empower parents with the knowledge needed to make informed decisions about their children's financial future.

Child Plans: Myths vs Reality:

Myth 1: Child Plan Is a Pure Investment Plan

Child plans are often perceived as a comprehensive investment solution for the child. However, it is necessary to understand that child plans are insurance-cum-investment plans offered by life insurance companies.

These plans typically come in two variants: ULIPs (Unit-Linked Insurance Plans) and traditional insurance plans. ULIPs invest in a mix of equity shares, debt instruments, and bonds, with a portion offering fixed returns. Traditional insurance plans, on the other hand, prioritise low-risk financial instruments like bonds, providing policyholders with guaranteed maturity returns.

It's important to recognise that child insurance plans are primarily designed to provide financial security through life insurance coverage, with the investment component serving as a supplementary feature.

Unlike mutual funds, which offer flexibility in terms of investment duration and cater to various financial goals, child insurance plans lack the same degree of customisation. Mutual funds allow investors to choose between short-term, medium-term, and long-term investment options, with professional management by fund managers ensuring optimal returns based on market conditions.

Thus, while child insurance plans offer a combination of investment and insurance, they may not provide the same level of investment flexibility and potential returns as mutual funds tailored to specific financial objectives.

Myth 2: It Offers Insurance Coverage to the Child

Many parents think that child plans offer life insurance coverage to the child. Contrary to common belief, child plans primarily offer life cover for the parent or guardian, not the child.

Many parents hesitate to invest in child insurance plans due to the misconception that it is inauspicious or unnecessary to insure a child. However, these plans do not provide direct coverage for the child's life. Instead, they serve as a financial safeguard for the family in the unfortunate event of the parent's demise.

By securing the parent's life, child plans ensure that the associated benefits can be utilised to fulfil the child's aspirations and educational needs, offering peace of mind and stability during challenging times.

Myth 3: Child Plan Offers Guaranteed Returns and Stability

Many parents are drawn to child plans by the promise of guaranteed returns and stability. However, the reality is that most child plans come with limitations and may not offer the level of certainty expected. This is mainly because traditional child plans invest their underlying assets in low-risk financial instruments and Unit-linked Insurance Plans (ULIPs) come with higher charges that ultimately reduce the returns.

On the other hand, investment in equity mutual funds involves a degree of market risk but historically has shown the potential for higher returns over the long term. By diversifying investments and adopting a disciplined approach, parents can mitigate risk while maximising growth potential, ultimately better positioning themselves to meet their child's financial needs.

Myth 4: Child Plans Ensure Comprehensive Financial Security for the Child

As a child insurance plan functions primarily as an insurance product, it generally includes a life insurance component equivalent to ten times the annual premium amount. For instance, if your yearly premium amounts to Rs 1 Lakh, the policy would extend a life cover of Rs 10 Lakhs throughout the policy duration.

Such limited financial protection often falls short of providing comprehensive security to the child in case of the parent's demise.

In contrast, buying sufficient coverage of term insurance can potentially offer maximum financial security at minimum cost, thus providing a more robust financial foundation for the child's education and other expenses.

Myth 5: Child Plans Offer Low-cost Investment Options

It's commonly believed that child insurance plans provide transparent and low-cost investment opportunities. However, this perception overlooks the often-undisclosed asset allocation charges and underlying expenses associated with these plans. Insurance agents may not fully disclose these fees at the time of purchase, leading to surprises for policyholders later on.

Unlike mutual funds, which are regulated by SEBI and subject to a capped expense ratio of 1.05%, child insurance plans have no such restrictions. This lack of regulation allows insurance companies to levy higher fees, including asset allocation charges, without transparently informing investors. In contrast, mutual funds adhere to strict transparency standards, providing clear information about all fees and charges upfront.

Therefore, while child insurance plans may appear to offer a convenient investment solution, the reality is that they often entail higher hidden costs compared to mutual funds. Investors should exercise caution and thoroughly evaluate the fee structure of child insurance plans before making investment decisions.

Myth 6: Child Plans Become Void if a Parent Passes Away

There's a common misconception that in case a parent passes away, the child plan would become null and void, leaving beneficiaries with no benefits. However, this notion is far from the truth. In fact, child plans are designed to provide financial security and ensure the realisation of a parent's aspirations for their child, even in the event of unforeseen circumstances like the parent's demise.

Contrary to popular belief, child plans offer death benefits that persist beyond the parent's lifetime. These benefits are structured to safeguard the child's future and ensure that the financial provisions intended for their upbringing, education, and other needs remain intact.

Myth 7: Child Plans Do Not Offer Tax Benefits

There's a prevailing misconception that child plans do not provide tax benefits. However, this is far from accurate. In fact, premiums paid towards a child insurance policy are eligible for tax deductions under Section 80C of the Income Tax Act, 1961, up to a maximum limit of Rs 1.5 lakhs.

Additionally, if the premium amount does not exceed 10% of the sum assured, policyholders can avail of tax exemption on the maturity benefit or death benefit (sum assured and accrued bonus) under Section 10(10D) of the Income Tax Act, 1961. These tax benefits serve as valuable incentives for individuals seeking to secure their child's financial future through insurance plans, making child plans an attractive option for tax-efficient investment and protection.

To conclude:

Separating child plan myths from realities is crucial for informed decision-making. While these plans offer a combination of investment and insurance, it's essential to understand their nuances and limitations. From debunking myths surrounding the nature of child plans to unravel the truths about their tax benefits and continuity in the face of unforeseen circumstances, this journey highlights the importance of thorough scrutiny.

Parents must recognise that child plans while offering a semblance of financial security, may not always be the optimal solution for building a robust education corpus or maximising investment returns.

Alternatives such as carefully selected equity mutual funds coupled with sufficient term insurance coverage offer greater flexibility, potential for higher returns, transparency in fees and charges, and maximum insurance coverage.

Ultimately, the choice between child plans and other investment avenues hinges on individual financial goals, risk tolerance, and long-term aspirations for the child.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.