An Endowment Plan is a blend of both life insurance coverage & long-term savings that offers assured returns. The whole amount of sum assured & bonus accumulated, if any, will be paid to his/ her beneficiaries in case of the sudden demise of the policyholder during the policy tenure. This plan requires the policyholder to pay a premium amount on a regular basis for a fixed period of time. Here, a part of their contribution is diverted towards life insurance coverage, ensuring financial security to the family members & partly gets accumulated towards savings.
A Child endowment plan is a type of life insurance coverage that helps parents plan their child’s future. 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. According to this plan, the maturity benefit will be paid to the child on the occurrence of certain events.
Features of Child Endowment Plan
Provided are the features of a endowment plan for child:
- 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.
- 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.
- 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.
- Premium Payment
It allows flexibility in the payment of premiums, which will help you align financial objectives with your capabilities.
- Flexibility
It offers flexibility in payment tenure ranging between 12 & 25 years.
Taxation benefits
Provided are the taxation benefits of the Child Endowment Plan:
- Sec 80C:
- Get a maximum tax deduction of up to INR 1.5 lakhs on the amount of the premium paid.
- Get a maximum tax deduction of up to INR 1 lakh on the amount of the child’s tuition fees paid.
- Sec 10(10D):The amount received from the child plan as death benefit, maturity benefit, or income benefit is exempt from tax.
- Sec 80DD:
- This section applies to children having critical illnesses or who need special attention.
- Get a maximum deduction of up to 33% in case of expenses incurred on the treatment of the child.
- Get a maximum deduction ranging between 40 & 80% in case of expenses incurred on the treatment of the children with minor & major disabilities, respectively.
- Sec 80E:
Get a tax deduction on the amount of interest paid on a loan against a child’s higher education.
Reasons to Invest in an Endowment Plan
Provided are the reasons to invest in an endowment plan:
- Financial Security
This plan provides financial security to the children in case of the sudden demise of their parents. This ensures the financial protection of children, enabling them to meet their life goals in the absence of their parents.
- Savings & Disciplined Investing
With a commitment towards the payment of the premium amount, this plan boosts discipline in savings. This ensures an amount is set aside on a consistent basis.
- Long-Term Goals
The lump sum amount received as a maturity benefit can be used to accomplish the long-term goals of the children. The long-term goals can be higher education, business start-ups, marriage, buying a house, etc.
- Taxation benefits
This plan is eligible for a deduction of tax u/s 80c of the Income Tax Act, 1961 on the amount of premium paid. Thus, this plan helps reduce the overall tax liabilities. Also, the lump sum amount received as a maturity benefit is also exempt from tax.
- Protection against Inflation
This plan also helps tostay ahead of increasing expenses by providing returns that grow over a period. This helps hedge against inflation, & the proceeds thus ensure maintenance of the buying capacity.
- Guaranteed Returns
Often, an endowment plan offers guaranteed returns on the amount of premium paid & the lump sum amount received on maturity.
Mistakes to Avoid While Buying a Child Endowment Plan
A Child Endowment plan should be considered in early childhood, as when an investment plan is started earlier, it allows more time for funds to grow. This ensures a lump sum amount would be received when your child is in need, i.e. in his/ her parents’ absence. It is important to avoid the myths, confusions, or dilemmas while planning your child’s future. The same are as mentioned below:
- Avoid thinking about the coverage of educational expenses
It is a myth in India that child endowment plans only include education-related costs, but this is not the case. This plan also includes some other financial objectives as well, such as marriage, buying a house, setting up a business, etc. This plan helps in hedging against inflation & wealth creation.
- Avoid worrying about the plan’s lock-in period.
This plan has a flexible policy tenure, ranging from 5 to 25 years, from which any plan can be chosen. This plan also allows partial withdrawal of funds & loan facilities, where the interest received is exempt from tax u/s 80E of the Income Tax Act, 1961.
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. The lump sum amount, i.e. maturity benefit received on the demise of parents, can be used for several different purposes, such as marriage, education, buying a house, setting up a business, etc. The maximum amount of sum assured can be up to INR 1 crore. This plan also helps boost savings by paying regular premium amounts& maintaining discipline.
Also Read: Life Insurance for Millennials: How Starting Early Saves Money?
