Child plans provide a viable option for parents looking to save for their ward’s education & marriage. Should you invest?
Are you one of those parents who are uncertain about what the best way is to save for your child’s higher education or marriage? While you are aware about the various investment options available, you don’t really understand the risk-return proposition that these products offer? You have been told that child insurance plans are a good investment for long-term, but alternative investments like mutual funds give far better returns than the former?
Let’s look at what child insurance plans have to offer vis-à-vis alternative investments like mutual funds, PPF and understand the pros and cons of choosing either of them.
What are child plans
Child insurance plans are basically insurance-cum-investment products whose objective is to secure your child’s future even when you are no longer around. There are many benefits associated with such plans. First, child plans provide a cover on death and help you save and plan for the children’s future expenses for education and marriage.
Second, unlike other insurance plans, these do not lapse on the death of the parent. The sum assured is paid to the child in the event of the death or disability of the parent before the term expires.
Typically in such cases, the premiums for the rest of the term are borne by the insurance company. This feature is called the waiver of premium. On the maturity of the policy, the maturity value is paid to the child. Therefore, the payout happens twice — after the death of the parent and at the time of plan maturity.
For starters, child plans can either be traditional plans or they can be market-linked plans, also known as child unit-linked insurance plans (Ulips).
Traditional or endowment plans, which only invest in debts, are usually more apt for conservative policyholders.
Child ulips invest primarily in equities, offering you higher fund value than traditional plans. You can choose any of the two options and even switch between the two, when your risk appetite changes.
Should you buy?
This is the dilemma most parents face. Are they really worth it, given that there is an alternate path to secure your child’s future financial needs where you can separate investment and insurance by investing in mutual funds or PPF and buying a term policy?
Term policies are high-coverage, low-premium insurance covers that protect you for a specific tenure. Here, in case of death, your beneficiary will receive the sum assured to cover the loss of income in your absence. The investment can be taken care through investment in a mutual fund or Public Provident Fund (PPF). The expected cost of your child’s education and/or marriage would be your target fund value. To achieve that target fund value, you can do the following:
* Create your own portfolio by investing in Systematic Investment Plans (SIPs) of equity mutual funds. One advantage of this approach is that you can easily change the fund, in case any particular equity fund does not perform.
* You can even opt for a regular equity-linked saving schemes (ELSS) by paying yearly
* A more conservative risk-averse investor can invest in PPF instead of equity funds. However, the returns from PPF are often low when adjusted with inflation. Investing in debt mutual funds can be a better option, if capital preservation is your prime objective.
If you have a moderate risk appetite, you can opt for balanced mutual funds.
The approach has its own merits, but there is also a possibility that in the event of death of a parent, the sum assured paid to the beneficiaries might be spent on other things instead of the intended purpose.
Child plan vs combination of term plan and MFs
Let’s take an example to show a comparison between a child plan and a combination of term plan and mutual fund.
As evident from the table, the term plan and mutual fund (SIP) combo does offer higher returns at the end of investment tenure, if we assume that both provide conservative returns of 8% per annum.
If you look at child plans, they come with various added advantages, such as waiver of premium and riders like accidental benefits and family income benefit. While accidental benefits can take care of your child’s needs in case of loss of family income due to your disability, family income benefit would help secure his/her interest in case of your death. These riders are, however, are not there in mutual funds as their focus is on higher returns.
So, if you are a savvy investor with a do-it-yourself investment approach, you can opt for a term insurance plus mutual fund approach. Child insurance plans, on the other hand, offer solution for an individual with hands-off approach.
The writer is CEO & co-founder of Policybazaar.com