Endowment Plan for Children: A Smart Way to Secure Their Future
A Child endowment plan is a type of life insurance plan that offers financial security towards your child’s future. This plan is a combination of insurance & investment, where the sum assured & accumulated bonus, if any, is paid to the nominees in case of the sudden death of the parents. This plan allows parents to save funds to cover the expenses that would be incurred in the future, such as a child’s education, marriage, or any other expenses. It best suits those who are futuristic & want to look for long-term investment options & are planning for some future events, such as their retirement, their child’s marriage, etc.
Reasons to Invest in an Endowment Plan
Provided are the reasons to invest in an Endowment Plan:
– Financial Security
This plan offers financial security to the family members in case of the sudden demise of the parents. It offers an assurance to the parents, letting children meet their financial objectives in the absence of their parents.
– Savings & Disciplined Investing
This plan involves regular payments towards the premium amount, instilling the habit of disciplined savings.
– Long-Term Goals
The maturity benefit received from an endowment plan is a huge amount to meet the long-term financial needs of children.
– Tax Benefits
The premium paid towards the plan is eligible for a tax deduction u/s 80C of the Income Tax Act, 1961. Additionally, the maturity proceeds are also exempt from tax u/s 10(10D) of the Income Tax Act, 1961.
– Protection Against Inflation
This plan offers a lump sum amount in the future, which is more than the total of the premiums paid. Hence, beating inflation & maintaining the buying capacity of the investor.
– Guaranteed Returns
This plan offers assured returns on the premium amount & maturity benefit paid, providing a sense of security.
Factors to be considered while deciding to invest in a child endowment plan:
Provided are the factors to be considered while looking for the Best Child Plan with endowment benefits:
– Safeguard the child’s future:
It should be such that it secures the financial future of your child.
– Support the child’s education:
It should support meeting the child’s educational expenses both at the school level & the college level.
– Funding a child’s marriage:
It should help meet the expenses related to your child’s marriage.
– Gifting the child a pool of funds for business startups:
It should be such that it can be used for gifting purposes to let children start their own startups.
– Saving on taxes:
It should be such that it lets you save taxes on the amount invested.
– Supporting the child’s future expenses:
It should be such that let you meet the future expenses of your child.
Pros of a Child Endowment Plan
Provided are the pros of a child endowment plan:
– Guaranteed Returns with Low Risk:
These plans are not market-linked, hence provide assured returns, in contrast to ULIPs, which are market-linked. Hence, this plan helps keep the capital invested safe, best suiting the parents who are looking for a low-risk investment.
– Disciplined Savings
This plan involves regular premium payments throughout the policy tenure, instilling the habit of disciplined savings.
– Life Insurance Cover:
This plan also offers life insurance coverage to the policyholder, i.e. parents in this case. In case the parents die at anytime during the policy tenure, the insurance company will provide death benefits to the beneficiaries, ensuring financial security to the family members.
– Maturity Benefits:
If the policyholder survives the plan, the policyholder will get maturity benefits according to the milestones of their child.
– Tax Benefits:
The premium paid towards the plan is eligible for tax deduction u/s 80C of the Income Tax Act, 1961. Additionally, the maturity benefits are exempt from tax u/s 10(10D) of the Income Tax Act, 1961.
– Bonus Additions:
Some of the endowment plans, such as participating plans, offer additional bonuses enhancing the maturity value.
Cons of a Child Endowment Plan
Provided are the pros of a child endowment plan:
– Subdued Returns Compared to Market-Linked Plans
This plan offers very low returns, hence secured, ranging between 4-6%, due to which it is not able to beat the inflation factor. It lets an investor meet inflation in the long term.
– No Flexibility
These plans are inflexible in terms of premium payment, fund allocation, policy tenure, etc. Once the plan is bought, it becomes difficult to make adjustments as it involves charges & penalties. Investors are not required to allocate their assets depending on the financial objectives or market situations.
– Liquidity Problems
This plan also comes with a lock-in period, during which an investor is not allowed to withdraw funds. Once the lock-in period is met, they can withdraw their fund partially, but subject to certain terms & conditions. Hence, making them less liquid whenever funds are required on an immediate basis to meet certain uncertainties.
– Inadequate Coverage
This plan offers lower life insurance coverage in comparison to a pure term plan, as a major part of the premium is allocated towards investments. Hence, this plan does not provides an adequate coverage to provide financial protection, securing the child’s future in case of parent’s sudden demise.
– Bonus Not Guaranteed
Under this plan, the bonuses are provided depending on performance, but are not guaranteed. Hence, the maturity amount may vary from the expectations.
Conclusion
An endowment plan lets parents secure their child’s financial future by achieving future financial objectives. Being linked to the market, they may not be flexible & may not offer higher returns. Hence, parents are advised to properly review the financial objectives, risk tolerance level, & investment horizon according to the life milestones of their children. They can also seek financial advice before investing in an endowment plan, considering it to be the best child plan.
The lump sum amount, i.e. maturity benefit received on the parent’s death, can be used for several different purposes, such as marriage, education, buying a house, setting up a business, etc. This plan also helps boost savings by paying regular premium amounts & maintaining discipline.
