Best Life Insurance Plan which can generate income

It is very prudent on your part, to start planning for your child’s higher education from a very young age. If you start early, you will be benefit from the power of compounding of investment returns. However, it is not prudent to mix life insurance and investment. The objectives of life insurance and investment are different. Life insurance provides your family risk cover in the event of an untimely death. On the other hand, investments help you achieve different financial objectives. Based on the limited information you have provided, you can do the following:-

1. Buy term insurance plan to buy life cover for your family in the event of an unfortunate death. Do not buy insurance cover on the life of your child. You should buy insurance cover on your own life and other earning members, if any, in your family. Since you want to secure your daughter’s higher education, the sum assured should not only cover the living expenses of your family but also the cost of your daughter’s higher education in the event of an unfortunate death. With term insurance you can buy adequate sum assured at a relatively low cost compared to the child insurance plans.

2. Sukanya Samridhi Yojana is a better scheme than PPF under Section 80C for your daughter. You will get 9.1% interest on your deposit which is even higher than PPF interest (8.7%) and like PPF the maturity proceeds of Sukanya Samridhi Yojana are entirely tax free.

3. For your daughter’s higher education you can also evaluate mutual fund child plans, e.g. HDFC Children's Gift Fund, ICICI Prudential Child Care Plan, Templeton (I) Children’s Asset Plan, UTI Children’s Career Plan Advantage Fund. These funds have given 17 – 18% compounded annual returns over the last 10 years, which is of much higher order of magnitude than life insurance child plan returns. These child plans also have schemes with different allocations to debt and equity. For example HDFC Children’s Gift Fund – Savings plan has a higher allocation to debt while HDFC Children’s Gift Fund – Investment plan has a higher allocation to equity. Since your daughter is very young, you can opt for higher allocation to equity, because you may get higher returns over a long time horizon. However, please note that mutual fund Child Plans do not qualify for 80C tax benefits. You can invest in these funds both in lump sum or through systematic investment plan (SIP). Financial planners advise investors to invest through monthly SIP because it helps investors to stay disciplined and also take advantage of rupee cost averaging in volatile markets.

4. If you want to avail 80C tax benefits for your investment, then you can also evaluate mutual fund Equity Linked Savings Schemes (ELSS), e.g. Axis Long term equity fund, Reliance Tax Saver Fund, Birla Sun Life Tax Relief 96, Franklin India Taxshield etc. Over a 10 year investment horizon good ELSS funds have given nearly 20% compounded annual returns. You can invest in ELSS funds towards various financial objectives, like your child’s education, marriage, your retirement plan etc. Good financial planning practice requires us to manage investment towards different investment objectives separately, so that one objective does not impact the other. As discussed earlier, investment through SIPs in mutual funds has a lot of benefits. How much to invest will depend upon the your daughter’s higher education goals and your savings capacity.

Please note that this a broad based guidance. You should consult with a financial advisor to discuss your financial / tax situation and also you specific financial objectives so that you can make the right investment decision.