Children’s education is one of the crucial goals for parents that they are ready to forgo their goal of buying a home or car or taking a vacation if needed. All the other goals can wait but not a child’s education. Giving their children the best education gives a sense of satisfaction for the parents. Taking this as an opportunity, insurance companies are selling their plans with an emotional appeal. So are child plans effective? Are they worth investing for a child’s future?
What are Child Plans?
Child plans are insurance plus investment policies. They can be traditional policies or ULIPs. One of the parents can be the holder of the policy, and the child is the nominee. If the policyholder survives the tenure of the policy, then regular payouts are made at pre-determined intervals, or a lump sum at maturity. In case the policyholder doesn’t survive during the policy tenure, the proceedings are transferred to the nominee. Also, in some cases, even the premium is waivered. Hence, parents find this attractive.
Why are the Parents Lured?
Insurance companies appeal emotionally to parents with their child’s education. The regular payouts and lumpsum payment during the child’s critical milestone years interest the parents. It gives them confidence that the child’s educational expenses are covered. Parents also opt for child plans due to lack of financial discipline. Parents often fear they might use the money kept aside for kids elsewhere. A child plan requires the insurance company also regulates consecutive payments of premium and the payouts. Hence they know the child’s money is secure.
What are the Alternatives?
Planning well in advance at the child’s early stages in life can help parents build the required corpus at their critical milestone years. Parents have two options to choose from, the child plan or term plan plus investment.
Child plans are investment plus insurance policies. The premium is invested in debt options, provide life cover, and offer regular payouts or lumpsum payment at the end of the tenure. The expenses in child plans are high. There are commissions, administrative charges, entry loads, and mortality charges. After deducting all these charges, the invested premium gives 6-7% return.
A Term Insurance with Investment in Mutual Funds
Another option is to take term insurance and invest the rest in mutual funds through SIP. With the help of a financial advisor, one can invest in mutual funds that best suit their tenure and risk appetite. One can also start investing in goal-based investing. Goal-based investing is a tool that calculates the required corpus at the end of a pre-defined time. All one has to do is give tenure of the goal and current cost of goal.
Let’s look at an example comparing both the options.
A child plan with Rs 5,000 monthly premium, sum assured of Rs 12,00,000 and maturity benefit of Rs 12,56,103 at 4% and Rs 18,39,963 at 8% at the end of 18 years. Term insurance with a premium of Rs 1000 per month, the sum assured of Rs 25,00,000 and investing the rest Rs 4000 in mutual funds for 18 years with a maturity benefit of Rs 24,02,253 at 10% and Rs 30,31,443 at 12%. The second option is beneficial for the child’s future.
|Child Plan||Term Plan with Mutual Funds|
|Monthly Payment (Rs)||5,000 premium||1,000 premium and 4,000 SIP|
|Tenure (Years)||18 years||18 years|
|Insurance coverage (Rs)||12,00,000||25,00,000|
|Maturity Benefits||@4% - Rs 12,56,103|
@8% - Rs 18,39,963
|@10% - Rs 24,02,253
@12% - Rs 30,31,443
Investing in mutual funds, along with taking a term plan, definitely gives more returns than a child plan. Child education has inflation of 10%, and mutual funds give returns that beat this inflation. The returns from a child plan cannot beat educational inflation.
One shouldn’t mix insurance and investment needs. Insurance is for earning members of the family. A child doesn’t need insurance as he isn’t an earning member of the family. Also, it’s better for the earning member of the family to take the insurance to cover the expenses of the child and invest the rest for the child’s education through SIP in mutual funds.