When parents say, “We want our kids to have the best of education at all costs,” they really mean it. If cost is not a factor, they should be saving the right way for their kid’s education needs. However, keeping in mind the rising cost of education and the uncertainty involved in the funding process, it is not easy to meet them unless you have a proper plan in place.
Various investment options such as public provident fund, mutual funds, shares, gold, real estate etc. are self-funded in nature. One needs to be alive to keep investing in them to accumulate wealth. But, on death, the funding in all likelihood would stop and the goal may be jeopardized. A better alternative, therefore, is the child insurance plan, which too is self-funded but in the absence of parents, the insurer funds the policy. These insurance plans are structured in a way that they help in meeting the education needs of the child.
Only a child insurance plan can ensure that funds as per the requirement and as and when required by the child can be accumulated. In the event of the insured parent’s death, the plan ensures that the desired sum is given to the child at the desired age, not earlier or later. Also, in the absence of the insured parent, the insurance company starts funding the policy. This ensures that the plan to save for child needs does not get derailed.
“A child insurance plan is designed to meet the financial needs of your children, be it higher education, marriage or helping them establish a business. Investing in child insurance plans means that the payouts, including the death benefit, from such policy should be used only for the child needs. Child insurance plans help you save regularly for your child’s needs, while carrying an assurance that your kids’ financial needs would be taken care of, in case one meets with an unfortunate event,” says Sanjiv Bajaj, Jt. Chairman & MD, Bajaj Capital Ltd.
In the event of the insured parent’s death, the plan ensures that the desired sum is given to the child at the desired age, not earlier or later. Unlike any other insurance plan, a child plan is unique because it continues even after the death of the insured. It happens because in the absence of the insured parent, the insurance company starts funding the policy. This ensures that the saving doesn’t get derailed. This is possible because child plans have a feature called ‘waiver of premium’ (WOP).
If you are buying a life insurance plan for the purpose of children’s needs, ensure that it has a ‘waiver of premium’ feature. What is unique about child insurance plans is the fact that the nominee gets the desired amount twice in case of the insured person’s death. The insurer pays the sum assured to the nominee immediately after the death of the policyholder. But, even after this payment, the company starts putting in the premiums into the policy on behalf of the policyholder. This money keeps growing and is given to the nominee once the policy matures. This way, the policy ensures that funds are available to the child at two life stages.
In most of such plans, regular payouts occur at a specific age of child. A fixed amount is received during different time intervals which can be mapped and utilized towards child education, marriage needs which arise at different time intervals. On death of the policyholder, the insurer pays the sum assured immediately to the nominee or the family. But the plan doesn’t end. The insurer keeps the plan active by putting in the premiums through the term of the policy. This money keeps growing and is given to the nominee on maturity. This ensures the child/nominee gets the required funds at the right age of child.
In most child plans, WOP is an in-built feature while in others it can be added as a rider at an additional cost. You may choose between an endowment plan and a Ulip. An endowment plan is a with profits or bonus-based plan and, hence, the return from it depends largely on the profits and surplus generated by the insurer. Since the funds are primarily invested in debt assets, the return on them is around 6 percent per annum. If your risk profile, keeping in mind planning for your kids, does not allow you to take risks through equity exposure, bonus-based endowment plans are best suited for you. However, if you are willing to bear volatility, Ulips, the returns in which are linked to the market, would make sense and especially when the child need is at least ten years away. Choose to stay invested in the equity fund option till you are three years away from the maturity year.
“Equities perform better over other asset classes over the long term. While considering a child insurance plan, make sure there is a WOP feature in it. This WOP ensures the premiums are waived off in the event of insured’s death while the policy still continues till its original term. If the insured (parent) survives the policy, the sum assured and the bonuses are paid to the nominee as survival benefit, while in case of Ulips, the parent receives the fund value. Many companies have plans that offer a feature of multiple payouts i.e. at specified time intervals the company pays a certain amount which can be used to fund various important events in the life of the child. And, if the Insured survives the policy term, the company pays the sum Assured as agreed at the signing of the policy,” informs Bajaj.
Typically, consider investing for child needs as one starts planning a family or when the newborn comes into the family. The right time will be when the kids are small, and your savings help create adequate corpus for them to reap benefits over the long term. The cost of education has been rising, especially for higher studies. It’s estimated that education inflation is double to that of general inflation which presently is hovering around 6 percent per annum.
Consider the cost of courses on the menu. An MBA from any of the Indian Institutes of Management (IIMs) would cost in excess of Rs 15 lakh here and a minimum of Rs 20 lakh abroad. For undergraduate engineering courses, the fees could be Rs 5 to Rs10 lakh, while for a five-year medical course at a private college, this could go up to Rs 50 lakh. In meeting education needs, investments earmarked for it including mutual funds, insurance and fixed deposits get liquidated. At times, parents fall short and find a gap in funding a child’s education. An educational loan fits in here and bridges the gap but then why to depend on the loan and pay interest when you can fund your child needs on your own?
“Many argue that a term plan and mutual funds combo may serve the purpose. While mutual fund investments would help in meeting education needs, a term plan proceeds can help tide over the situation in case of death. This may not work in all situations. There is a higher probability that the sum assured of, say, Rs. 21 lakhs, when the child is still small, gets spent on other expenditures rather than on his particular education needs. To ensure that the right amount is there for the kids at the right time, a child plan with WOP is the perfect solution,” says Bajaj.
Unit linked child plans will be better than the traditional child plans especially when the need for funds is at least ten years away. Child plans with WOP are costly compared to normal plans, but for a cause. The extra that one pays goes towards ensuring that the child gets the decided amount at all costs. Child insurance plans with WOP feature ensures the child gets desired amount at the desired age. When it comes to meeting child needs with higher certainty, one would not like to take chances, therefore, choose to meet the little ones’ dreams through a child insurance plan.