An Endowment Plan is a combination of both life insurance coverage & long-term savings that offer assured returns. This means that in the event of the policyholder’s sudden demise during the policy tenure, the entire sum assured, along with any accumulated bonus, will be paid to his/ her beneficiaries. Additionally, this plan entitles the policyholder to receive the sum assured amount along with any accumulated bonus if they survive the policy. Under this plan, a policyholder is required to save a certain amount regularly for a specified period to receive a lump sum amount at maturity, provided they survive to maturity. A portion of the premium amount is diverted towards life coverage, & the remaining part is accumulated as savings.
Endowment Plan as a Child Plan
While looking for the Best Child Plan, you can also consider an endowment plan for your child, which is a type of life insurance coverage that helps parents plan their child’s future. Just like ULIP, it also offers the dual benefit of insurance & investment. This plan enables parents to save funds to cover future expenses, such as their child’s education, marriage, or other expenses. According to this plan, the maturity benefit will be paid to the child on the occurrence of certain events & death benefits in case of the demise of the policyholder. In this article, we will be going through the pros & cons of an endowment plan as a child plan.
Features of Child Endowment Plan
Provided are the features of an endowment plan as a child plan:
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Financial Security
It is a life insurance plan that secures the future of your child in their parents’ absence. In case of the sudden demise of the policyholder, beneficiaries will receive a lump sum amount of the death benefit, which can be used to bear the child’s education.
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Builds Savings Habit
This plan helps build a habit of saving for children at an early stage, which will be further used to secure their future.
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Taxation Benefits
Get taxation benefits u/s Section 80C of the Income Tax Act, 1961 on the amount of premium paid, a maximum of INR 1.5 lakhs. The death or maturity benefits received are also exempt from tax.
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Premium Payment
It allows flexibility in the payment of premiums, which will help you align financial objectives with your capabilities.
Pros & Cons of an Endowment Plan as a Child Plan
Provided are the pros of an Endowment Plan as a child plan:
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Guaranteed Returns with Low Risk:
These plans use a safe mechanism as they follow a conservative approach to keep the funds safer. Hence, if parents want to invest in a safer child plan, which contains lesser risk, as against market instruments, endowment plan can serve the purpose.
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Disciplined Savings:
As it involves regular investment commitments, it encourages & inculcates a habit of disciplined savings. This means it includes regular savings, i.e. monthly or annually from your income to meet future emergencies.
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Life Insurance Cover:
As this plan is a blend of life insurance & investment, offering life insurance coverage to parents is an added advantage. This means in the event of a parent’s death at any time during the policy tenure, the death benefit will be paid to the nominees, i.e. children in this case, securing their financial future.
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Maturity Benefits:
A lump sum amount would be received if the policyholder survives the policy tenure on the event of certain milestones, such as a child’s higher education or marriage, in the form of maturity benefits.
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Tax Benefits:
These plans allow a deduction of tax on the amount of premium paid u/s 80C of the Income Tax Act, 1961. Additionally, the maturity benefits are also exempt from tax u/s 10(10D) of the Income Tax Act, 1961, enhancing the value of returns for your children.
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Bonus Additions:
Many endowment plans offer an additional bonus, enhancing the maturity value, especially in the case of participating plans.
Provided are the cons of an Endowment Plan as a child plan:
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Lower Returns in Comparison to Market-Linked Plans
They offer secure returns but are relatively low compared to market returns, i.e. in between 4-6%. It offers a very low rate, even lower than the inflation rate, making it incompatible with other investment options.
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No Flexibility
It follows a rigid schedule of premium payments, which makes it inflexible as the premium is to be paid at a predetermined interval of time, which can be monthly, quarterly, or annually. Let’s suppose your financial position changes at a certain point in time, making it difficult for you to make premium payments, which will lead to the lapse of the policy.
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Liquidity Problems
These plans are not liquid, which means they don’t allow easy access to the funds invested, as they come with a lock-in period of 2-3 years. During this lock-in period, the plan is not allowed to be surrendered without losing most of the premium paid. This makes it unfit for the parents struggling from financial emergencies. Options such as ULIPs, mutual funds, or PPFs can be considered if liquidity & flexibility are your priorities.
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Inadequate Coverage
The life component under this plan is quite low in comparison to term plans, making parents insecure about their child’s future. Hence, making a term plan with a high sum assured or any child-focused plan is a more appropriate choice.
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Bonus Not Guaranteed
The bonus amount associated with the endowment plans is not guaranteed as it is performance-based. Hence, though the sum assured remains safe, the total amount to be received at the time of maturity is unstable, i.e. can vary. Due to this, there arises uncertainty or risk, where parents were expecting a stable return on the event of their child’s higher education or marriage.
Conclusion
A Child Endowment Plan offers a dual benefit of life insurance & savings under a single plan. This plan helps secure your child’s financial future by achieving future financial goals. But, it may not be flexible & may not offer higher returns due to not being linked to the market. Hence, parents are advised to properly check their financial objectives, risk tolerance level, & future financial requirements of their children before investing in an endowment plan, considering it to be the best child plan.
