The biggest financial commitment of any parent is undoubtedly aspire to offer the three best things to your children – the best education, a decent life style and their grand marriage. With the birth of child, some of us spontaneously intend in our mind to get child insurance policies towards planning for our children’s financial goals. But the high cost of education and sky rocketing marriage expenses, one may not be able to meet our children’s future through these policies as the inflation bug is eating the value of your savings every single day.
Some Children Insurance Plans
Recognizing this concern, many large insurance companies have offered not one, but many flavors number of child insurance plans which claim to take care of most of the expenses associated with your child’s future. However many of these “childcare” investment plans turn out to be nothing but costly such as Unit Linked Insurance Plans (ULIPs). You see, more often than not ULIPs and endowment plans, don’t offer adequate insurance and nor do they generate adequate returns which can counter inflation.
Similarly mutual Fund houses too have offered products which are said to have designed especially to take care of childcare expenses. But the question we want to ask you is – are these ready-made plans worth for your children’s life goals? Most of these child insurance plans may claim to meet your personal other financial needs, not so big like car, vacations etc. but could not meet ever your children’s bigger goals such as higher education and grand marriage. Because, most of the plans function like normal children policies but with a different asset allocation pattern. While some might have a higher exposure to debt to provide stability to the portfolio especially for investors whose financial goals are near to realization, others might focus more on equity investments to provide growth for their investors whose goals are far from maturity.
However, some money back policies provide a lump sum amount when the child reaches a particular age, but there is a chance that corpus may be used for some other purposes.
Chalk out your Plan
Our view that, parent should not get carried away with the emotional names associated with ‘child’ of the policies. They should avoid buying such insurance cover for their own children because a child’s demise is an emotional loss and not a financial loss and instead chalk out your financial plan and maintain asset allocation. While selecting a suitable plan, parents must understand their specific financial needs along with the unique needs of the child. Factors like age of the child, periodic monetary requirements for marriage and education, additional protection and maturity benefits sought must be taken into account.
Let’s consider an illustration for Mr. Sharma who has a 2 years old daughter, who is going to graduate after 16 years. Mr. Sharma intends that her daughter should pursue engineering. If the cost of her graduation in today’s value is Rs 5 lakh, then he would need Rs22.97 lakh to send her daughter to engineering college after 16 years while assuming the cost of education which is to be inflated at the rate of 10% per annum. And an investment of Rs 4,209 every month will help Mr. Sharma to realize this financial goal assuming returns of 12% per annum. However, if Mr. Sharma has opted to buy any traditional child insurance plan, he would have to shell out more Rs3,016 every month to achieve this goal as average traditional child insurance policies are currently giving return only 6% per annum.
While chalking out any financial plans it is necessary to include a sufficient insurance cover as well. This is because the demise of the breadwinner of the family could lead to a potential setback to one’s child future goals. Therefore, Mr. Sharma should buy a plain vanilla pure-term plan with nominal cost and sufficient funds should be available to cater the upbringing child care expenses.
Hence, we have already been mentioned that ULIPs and children endowment plans relatively don’t offer adequate insurance and may not generate adequate returns either. It is vital that you keep your investments and insurance separate. The only role insurance must play in your life, is to protect you and your family from financial trouble. Child insurance may be a safeguard for dependents in the event of unfortunate bereavement of parents. Mixing your insurance requirements with your investment objectives shall not always be meaningful. Thus, buying the policy in the name of a child is just mental block, not serving meaningful purpose.
Do it yourself (DIY)
If you are financially savvy, there is no better option than buying individual insurance products and tweaking them to suit your needs. Those of you who want to keep it simple can choose dedicated products. Every parent should start planning for their children over 10-20 years before their milestone years but not at the cost of any saving child insurance plans. They can invest in diversified equity mutual funds as now; equity is one of the asset classes that generate handsome returns over this time span. If they are risk-averse investor, they can look for a balanced fund or MIP structure to invest in mutual fund schemes.
Rationally, if investors can create their own cash flow and manage funds properly, special plans are not required. They will be better off with pure insurance, that is, a term plan and allocate their money towards the ideal portfolio mix such equity, PPF, debt and gold etc. But if they are unsure about their ability to handle factors such as children’s financial goal, insurance requirement, investment orientation and payout requirements, dedicated plans and as many of you might have several doubts and uncertainties about how to plan and where to invest for meeting these goals, it would better be prudent to take the help of an professional financial planner, who might help you manage your finance better.
This article got published in Hindi Dainik Bhaskar on 15-09-2015, Read to click here
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