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Should you Depend on Education Loan to Fund your Child's Dreams?

dateKnowledge Centre Team dateMay 24, 2021 views117 Views
Child Insurance Plan | Child Education

Organizations are now looking for “employable” people rather than graduates with mere shiny degrees and polished resumes. Universities around the world are gearing up to keep up the pace to churn out skilled talent that can hit the ground running from day one.

With a rapidly changing market landscape, companies want quick results, employees are staring at shorter stints and gig seems to be the order of the day. The writing on the wall is clear. Students have to be “industry-ready”.

Institutions have come up with interesting flavours to add to their plain-vanilla degrees so that hiring managers recruit from their campuses. Some offer industry-capstone projects, whereas others send students on international immersions. Others focus on internships in parallel to coursework-all this to keep students in sync with the real world. But the bottom line-cost overheads shoot through the roof and the coveted degree becomes costlier. Can a child insurance plan cover the cost of education so that your kid can achieve all their dreams?

How Much does a Good Education Cost?

Quality education comes at a cost, even at institutions promoted by the Government of India. IITs and IIMs were initially fully funded through the public exchequer. However, the institutions are now increasingly becoming autonomous and self-financed to reduce any dependency on public funds.

For example, a 4-year BTech course at one of the premium engineering institutions costs a minimum of Rs.12 -15 Lakhs whereas if you opt for a privately owned premium institutions, you will have to pay up approximately Rs. 25 Lakhs. MBA programs at the top B-Schools in India cost between Rs. 12 to Rs. 25 Lakhs.

Inflation in Higher Education

10 to 15 years from now, these institutions might as well charge anywhere between Rs 20 and 40 Lakhs for similar graduate and postgraduate programs. Reason? Inflation.

Higher education inflation in India is one of the highest in the world. The cost of a graduate program will more than double in 10 years.

Saving for Higher Education with Child Education

So, how do you draw out the best child education plan so that you give the best possible education without straining your finances? Look at the Guaranteed Savings Plan (GSP) offered by Canara HSBC Oriental Bank of Commerce Life Insurance.

Child Insurance Plan | Child Education Fund

For example, if you plan to start investing Rs. 1.65 lakhs each year for just 10 years at the age of 30, you can expect to receive approximately Rs. 30 lakhs at the end of 15 years. While you will invest in the plan for only 10 years, your money will continue to grow for another five years before maturity.

The icing on the cake, Rs. 1.5 lakhs invested each year is deductible from your taxable income under section 80C of the Indian Income Tax Act.

You will end up saving another Rs. 42,000, payable in taxes, every year (if you fall in the highest tax bracket).

A quick comparison of the Guaranteed Savings Plan with an education loan will help understand the direct and indirect benefits of starting early:

Education Loan Guaranteed Savings Plan
Amount Spent on Education Rs. 30 Lakhs Rs. 30 Lakhs
Amount Spent on Interest Rs. 17.5 Lakhs 0
Amount Saved in Taxes (30% Tax) Rs. 5 Lakhs Rs. 4.2 Lakhs
Net Amount Spent on Education Rs. 42.5 Lakhs Rs. 25.8 Lakhs

This is a clear benefit of planning and saving for your child’s higher education goal, rather than borrowing for it. You may also apply similar logic to other goals and purchases in life.

How will an Education Loan work?

Education loans are a good alternative to funding your child’s education. If you look at it, if you can secure an adequate education loan for your child, you can not only fund the education but also enjoy some additional tax rebate under section 80E.

However, education loans, like any other debt, have their limitations:

  • Need for Collateral

    The first idea that flashes across your mind when you think of college fees-Education Loans. But did you know that Banks and financial institutions are very conservative when approving education loans? To avail of a loan of Rs. 50 Lakhs, you must submit collateral worth at least Rs. 70 lakhs.

    If your property is already under hypothecation and you are paying your home loan, this may not be eligible for showing as collateral.

  • Collateral Free Loans Not Enough & Costly

    As per banking regulations, loans without collateral can be disbursed only for amounts up to Rs. 4 Lakhs. This amount will not suffice to complete a professional course at most of the top-tier institutions.

    Also, unsecured loans do not enjoy the lower rate of interest as secured loans. So, it will also be costlier for you.

  • Real Cost of Education After the Loan

    Even if you do provide collateral and manage to get an education loan of Rs. 30 lakhs repayable over a 10-year tenure, you must do a quick back-of-the-envelope calculation of the total “cost” of the loan. The interest payable is the cost that you pay for the loan.

    At 10% interest, you will have to pay approximately Rs. 18 lakhs on a loan of Rs. 30 lakhs, i.e., a total of Rs. 48 lakhs.

  • No Safety for Your Child

    If under an unfortunate spell of events you are lost to the family, an education loan can leave your family without an asset or with a large financial burden.

The most visible feature of an education loan is the tax benefit under section 80E of the Indian Income Tax Act. The interest component can be deducted from the taxable income.

For example, if you fall in the 30% tax bucket, you will save about Rs. 90,000 (30% of the interest paid on the education loan) in taxes in the first year. (assuming a loan of Rs. 30 Lakhs at a rate of interest of 10% for 10 years)

But you end up paying approximately Rs. 3 lakhs to get this benefit. In 10 years, you will pay a total of close to Rs. 17.5 lakhs as interest on this loan, while saving about 30% of this amount in taxes each year.

This implies your total outflow over the cost of education will be about Rs. 12 lakhs on a loan of Rs. 30 lakhs.

However, instead of using the loan to fund the entire cost of higher education for your child, you can aim to use this option only as a last resort. You should only use an education loan to fill the gap in your savings for the goal and the actual cost.

It would be much more affordable and fulfilling to have an adequate corpus for higher studies. But just in case you fall short, the option of borrowing would always be there.

Protect the Dreams of your Child with a Savings Plan

Investment in insurance policies gives 360-degree benefits that include return on investment, insurance cover, and tax deduction/exemption. In addition to this, you get a life cover that gives you peace of mind because the policy will ensure your family goes ahead with the education plan even if, unfortunately, you are not around.

Both Invest 4G and Guaranteed Savings Plan offer the feature to secure your child’s goal from your early demise. If you use this option, the insurer will invest the remaining premiums in the policy and provide your child with the maturity value after your death.

Considering the increase in costs of quality education, the challenges and costs of availing education loans, investments in insurance policies will not only help fund education but also result in significant savings.

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Frequently Asked Questions (FAQs) for Child Insurance

Any parent with a child between 0-15 years should opt for a child insurance plan. It helps you deliver inflation-beating returns for the various needs of the child while he/she grows up. As a child grows up, his/her financial needs increase substantially.

The importance of a good education cannot be overstated. Without quality education, a child may not reach his/her full potential. But the rising cost of education can become an impediment in higher education. A child education plan ensures that you do not have to worry about the money for your child’s education. It is a mix of insurance and investment. A part of child education plan is used to provide the financial security of insurance, while the balance is invested in market-linked instruments. The investible portion delivers decent returns in the long run, helping you accumulate a corpus for your child’s education.

Child plans are tailor-made financial products designed to secure children’s future. Typically, child plans have two components—insurance and investment. The insurance component protects the child in case of the parent’s demise, while the investment helps in accumulating a corpus for the child’s needs such as education and marriage. Child plans have several features that are primarily aimed at financially securing children. Some of the features are:

  • Maturity benefit
  • Premium funding option
  • Partial withdrawals
  • Milestone payments
  • Various investment funds
  • Protection of returns

The right time to buy child plans depends on the financial goal and the type of policy. Child insurance policies are long-term instruments and to generate decent returns it is advisable to invest as early as possible. You can invest in child insurance policies even before the child is born. Child education policies are relatively short-term policies. Child education policies can be chosen according to the financial goal. You can invest in child education policy as soon as the child is born if you plan to fund his/her primary and secondary education through the policy. If the aim is to accumulate funds for the higher education of the child, then you can invest at a later stage. In any case, it is not advisable to invest after the child has turned 15.

Child plans are meant to build a financial buffer for your child’s future needs, so, it is important to have a fail-proof plan. A few things to consider while buying child plans are:

  • Goal: It is pertinent to have a clear goal in mind as it determines the type and tenure of the policy. You should invest in a child plan as soon as the child is born. Starting early gives your investment to grow and helps you prepare better for your child’s needs. Similarly, selecting a long-term policy protects your child for a longer-term.
  • Premium waiver: While buying a child plan, it is mandatory to check if the premium waiver facility is available or not. Not having a premium waiver option can leave your child vulnerable in your absence.
  • Inflation: When you are investing for the long term, external factors like inflation cannot be ignored. Invest in ULIPs to generate inflation-beating returns. Invest 4G plan offers customers an option to choose from seven different funds with varying degrees of exposure to equity.
  • Bonus component: Along with the basic benefits of a child plan, insurance companies also offer additional benefits. Even though these benefits are small, they could add value considerably in the long run. For instance, Invest 4G plan provides benefits such as wealth boosters, loyalty additions and return of mortality charges.

The eligibility to open a child education plan is similar to a child insurance plan. The entry age is generally between 18 and 65 years. The maturity age is between 23 years and 80 years. You can start investing in a child education plan with Rs 5,000 per month or Rs 50,000 per year. The policy tenure varies between 5 years and 30 years.

There is no universal minimum instalment for a child education plan. Every insurer has its own minimum limit, even different plans have a different minimum limit. Invest 4G plan has a minimum limit of Rs 5000 if you choose to pay monthly premiums. The minimum premiums for quarterly and half-yearly payment tenures are Rs 15,000 and RS 30,000, respectively. In the annual mode, the minimum premium is Rs 50,000.

Child education plan can either be unit-linked or non-linked. The interest rate of ULIPs is determined by the fund chosen by the policyholder and the performance of the market. The interest rate for non-linked child education plan is decided by the insurance company.

The policy for premature closure of child education plan deposit differs from insurer to insurer. Some insurers allow premature closure of child education plan deposit. If the account is closed before the lock-in period expires, the fund’s value minus the surrender charges id deposited in the discontinued policy fund. The amount earns a minimum of 4% interest and will be paid to you after the lock-in period gets over. It the policy is surrendered after the lock-in period, the total fund value minus the surrender charges will be given to you. But premature closure of child education plan can be fraught with risks and you may not achieve the stated aim. Invest 4G plan allows you partial withdrawals without surrendering the policy, which essentially disincentivises premature closure of the policy.

Child education plans come with flexible payout options. You can either set up a standing instruction for instalment payment when you buy the policy or inform the insurance company during the policy tenure. Insurance companies generally accept requests for instalment payment a few months before the maturity.

One of the defining features of child education policies is the partial withdrawal facility. Most insurance companies allow partial withdrawal from child education plans to take care of liquidity needs. Invest 4G plan allows partial withdrawal after the 5th policy year.

You can avail a secured loan against a child education plan. The loan can be used to fund the higher education of the child.

Child education plans are like child insurance plans with some slight differences. Child education plans have relatively shorter tenures than child insurance plans. Child education plans have milestone payments coinciding with the educational stages of the child. These plans have a limited scope and are not dynamic products like child insurance plans.

When you buy life insurance, the insurance company asks for the nominee details. Only the person named as the nominee in the policy can cash out a life insurance policy in case of death of life insured.

Child education plan not just secures the financial future of the child but also provides tax benefits to the policyholder. The premiums paid for child education plan are eligible for tax deduction under Section 80C of the Income Tax Act. The maturity amount is also tax-exempt under Section 10(10D) of the income tax law.

While there are several child plans in the market, the Invest 4G plan is the best of the lot. Invest 4G with its unique proposition provides all-round protection to your child. With the online ULIP plan , you can decide the premium payment tenure and also the settlement option.

You can invest in a number of financial products for your child’s education. If you need a long-term savings instrument, the PPF is an eligible option. But if the child’s education is the sole aim of your investment, nothing is better than a market-linked scheme. Market-linked investments, especially equity investments tend to perform better in the long run. Investment in market-linked schemes can ensure handsome returns on your savings by the time your child grows up. Opt for Invest 4G plan to give your child a secure educational future.

Getting insurance required a visit to the bank or the insurer’s branch earlier. But with the popularity of online ULIP plans, getting an insurance plan has become extremely easy. You can buy a host of insurance products directly from www.canarahsbclife.com and get discounts on the premium from the company.

While the cost of insurance depends on a host of factors such as tenure, coverage and the mode of payment. With Invest 4G plan, you can start investing for the financial future of your child with just Rs 5,000 every month. However, if you are not clear about the cost of insurance for your child, you can use the ‘life insurance calculator’ in the ‘tools and calculator’ section of www.canarahsbclife.com. Similarly, you can use the ‘child education planning calculator’ to get an idea of the cost of child education plans.

Considering the flexibility in the premium payment tenure and the payout settlement, Invest 4G is the best scheme for the child. The Invest 4G plan also provides the premium funding option which ensures the financial stability of the child even in the absence of the policyholder.

To choose the ideal child insurance plan, you will have to start with planning the various stages of the plan and your child-specific milestone payments.

  • Paying capability: Just investing in a child insurance plan is not enough, you will have to pay the premiums regularly and timely to keep the policy active. Make a correct estimate of your paying capability and decide the premium payment frequency.
  • External factors: While buying a child insurance plan, consider the external factors such as inflation and interest rates before finalising the maturity benefit.
  • Premium waiver: The premium funding facility is a crucial feature for the success of the child insurance plan. Not having the premium waiver facility can leave a costly chink in your child insurance armour.

To choose the ideal child insurance plan, you will have to start with planning the various stages of the plan and your child-specific milestone payments.

Having life insurance has become a necessity and the earlier you buy one the better. Life insurance plans are cheaper when you are young. Moreover, when you are buying products such as ULIPs that have an investment component, having a long policy tenure helps in compounding your savings.

Most insurance companies have started offering online policies. You can either pay through offline mediums or opt for online ULIP plans. Buying insurance policies online is cheaper and hassle-free. The premiums can easily be paid through the website or mobile app.

There are three major rider benefits provided with child insurance plans.

  • Premium waiver benefit
  • Accidental death and disability cover
  • Critical illness cover
  • The frequency of the payout is decided by the policyholder while buying the insurance plan. Even if you fail to define the frequency of the payout while buying the policy, it can easily be rectified during the policy term.

    You can appoint a minor as nominee for your plan, but you will have to nominate an appointee who will have to give his/her consent to act as an appointee. The appointee will cease to hold power once the minor nominees become majors. In the event of a claim, of your nominee is minor and you did not name an appointee, the proceeds will go to the legal heirs.

    No child should give up on his/her dreams to study in premier institutes like IIT and IIM due to financial constraints. With the rising cost of higher education, investing in a child plan has become extremely important. Child plans help you save in a disciplined way for a secure financial future of your child.

    Canara HSBC Oriental Bank of Commerce offers a plethora of child plans to take care of varied needs. With unique features such as fund switching, premium redirection, change in sum assured and return of mortality charges, child plans from Canara HSBC provide unprecedented coverage.

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