Higher education used to be extraordinarily cheap in India. But that is changing with remarkable swiftness.
So, should you start saving for your child's education even before he or she starts going to nursery school?
If you're the type who likes starting early, it might be a good idea to start looking at insurance policies that mature when your child comes of age.
Now that education is getting costlier, insurance companies are also realising that it's important to offer new schemes. So, there are more such policies than ever before.
These policies mature when your child comes of age and the money can be used for higher education or marriage expenses.
Children's policies are of two types. Under the first plan, the child himself is insured although the premium is paid by the parents.
Max New York Life's Children Endowment Policy falls under this category. It has two variants--endowment to 18 and to 24.
The minimum age is 91days and the maximum age is 13 years in case of endowment to 18 and 15 years in case of endowment to 24.
The sum assured varies between Rs 1 lakh and Rs 1 crore (Rs 100,000 and Rs 10 million) and is given to the child on his 18th or 24th birthday depending upon the plan.
The policy gives the option of receiving the bonus annually or as a lump sum at the time of maturity. The bonus can also be used to offset the premiums.
If the child dies before the plan matures, the nominee will receive the premiums paid till that date along with interest and any accrued bonus.
Aviva's Treasure Plus, Birla Sun Life's Young Scholar Plan, HDFC Standard Life's Children Plan, Om Kotak Mahindra's Kotak Child Advantage Plan, ICICI Pru's Smart Kid and LIC's marriage and education annuity plan all fall under the second type of policy.
Under this category, it is the parent who is insured but in case of his untimely death, or at time of the maturity of the policy, the child gets the benefit.
Aviva has tied up with ABN Amro Bank and offers its Treasure Plus policy. Here the maximum monthly premium is Rs 4,000 and the sum assured is up to 120 times the premium paid.
This is a mutual fund-based plan. The premium is invested in the market. So your returns will depend upon the NAV on the date of maturity of the plan.
In case of death of the parent or the maturity of the policy, you get the sum assured or the value of the investment fund, whichever, is higher.
Thus, if the market is doing well, your returns can be much higher than the sum assured. However, in case of a lean phase, the returns may be lower.
But in that case, the sum assured will be paid. For instance, if you invest Rs 4,000 every month for 10 years, in case of your death before the maturity of the policy, your child will get Rs 4.8 lakh (Rs 480,000) or the value of the investment on that date, whichever is higher.
LIC's Marriage Endowment/ Educational annuity plan is meant specifically for the purpose of providing money for higher education or marriage expenses.
Under this plan, if the parent dies, the policy is not terminated and the money is not passed on to the child immediately. Instead, no further premiums are payable but the bonus continues to accrue for the full term of the policy.
The sum assured, plus the accumulated bonus for the full term, are then paid to the child at the end of the policy's term.
The minimum sum assured is Rs 30,000 and there is no upper limit. The policy can be taken for a term of between five years and 25 years.
Om Kotak Mahindra's Child Advantage Plan is meant for children up to the age of 17 years and the maximum sum assured is Rs 25 lakh (Rs 2.5 million).
Here too, the policy can continue in case of death or permanent disability of the parent, but an additional premium of Rs 277 per year needs to be paid for these riders.
Hence, if you have a six-year-old child and you take a policy of Rs 1 lakh for 15 years, you will pay an annual premium of Rs 6,640 in case of a simple policy and Rs 6,917, if you take the riders.
Under LIC, on the other hand, you'll pay a premium of Rs 6,537.
Under the Kotak plan, on maturity, the child will receive Rs 1 lakh along with accumulated bonuses. Assuming that the accumulation fund grows at 5 per cent annually, the child will receive Rs 117,100 at the end of 15 years.
Similarly, under the Birla Young Scholar scheme, an annual premium of Rs 8,062 for 15 years on a sum assured of Rs 1 lakh will yield approximately Rs 165,000 at maturity.
ICICI Pru's Smart Kid policy gives you the option of receiving the money at different stages of your child's development. For instance, let us assume your child is five years old and you have taken a policy for Rs 5 lakh (Rs 500,000) for 18 years.
When your child turns 16, he'll get 20 per cent of the sum assured or Rs 1 lakh. On his 18th birthday, he'll get 25 per cent of the sum assured or Rs 125,000.
When he turns 21, he will get a further 25 per cent of the sum assured or Rs 125,000 and then on maturity of the policy, he will get the remaining 30 per cent of the sum assured along with the accumulated bonus.
Nearly all these policies mature when the child turns 18 or 21. At the time of maturity, the sum assured along with the accumulated bonus is given to the child.
Although there are no guaranteed returns, most policies give returns of between 5 per cent and 6 per cent. Moreover, these returns are tax free under Section 10 (10D). The premiums paid are also eligible for a tax rebate under Section 88.
Though the returns are not very high, most financial planners recommend that you buy a children's policy. Says Sanjiv Bajaj, director, Bajaj Capital, "Children insurance policies ensure a disciplined saving mode for the child's future. Moreover, since the returns are tax-free, you need not worry about what the tax structure will be like 20 years down the line."