Greetings Friends,
The Birth of a Child brings a lot of joy to parents.
After the initial euphoria
settles down, the future expenses start staring at your face. Even if you don’t
think about this, the innumerable ads on TV, in newspaper, Bill Boards will not let
you forget them.
They start emotionally
attacking you
“Are you a Responsible
Parent”?
“Have you planned for your Child’s Higher Education”?
“Have you planned for your Child’s Marriage”?
So, then, you are forced to
start thinking of your Childs Future.
And, what do you see?
Of course, the umpteenth Child Plans splashed across. Whether you like it or
not, you will be bombarded with the "specialties" of these plans and
the Companies leave no stone unturned to make you feel that they are next only
to God when it comes to protecting your dear child's future.
They promise you that they
will pay for your Child’s Higher Education, her Marriage, etc.
And, yes, these Ads spare
no effort to instill fear in you
“What will happen to your
Child in case of your untimely death?”
This one line is enough for
every parent to run to Insurance Agents to get a Child Plan.
Before diving into the sea
of these Child Insurance Plans, you will do well to do some basic homework like
1. 1. When will your child need
the money?
2. 2. How much will you need for the particular
goal (Marriage, Education)?
3. How much you will be
able to save?
4. 4. How much Insurance Cover I
need?
Besides the above, you will
also have to consider various factors like whether you have any loan, you have
your own house, are there any other breadwinners in the family, etc
UNDERSTANDING CHILD INSURANCE PLANS :
There are basically 3 types of Child Insurance Plans namely
1. Money Back :
This is by far the most POPULAR plans. Under this plan, your child will get
Survival Benefits at regular intervals.
For ex :
AT your Child's 18 years of
age, she would get about 20% of Sum Assured, and a further 20% at age of 20 and
so on.
This Plan is useful for
those who feel the need for Lumpsum requirement at regular intervals and helps
you in Life Stage Planning.
Another good benefit, is
these plans offer Premium Waiver Benefit which ensures
that in case of death of a Parent, then the Premiums are waived off and The policy continues with benefits. (Please make sure, that this benefit
is there in the policy before taking one).
The BIGGEST disadvantage
with these plans is the dismal returns often failing to match even Inflation
returns.
Especially, if you are
planning to buy Money Back Plans for your Child's Education, then this is
definitely NOT advised. Education Inflation is at around 12% and this Money
Back should be giving you less than 7%........leaving you grossly underprepared
at the time of Goal.
Also, the Premiums are
steep and are best avoided.
MOST IMPORTANT
These Plans actually cover
the Child and not the Parent! (How stupid). So, in case of the untimely death of
your Child, you will get the Sum Assured. I wonder which Parent would like to
take this?? It is your Child who needs Financial Security and not you!
If the Child survives
The term, then you will get the entire Sum Assured along with Accrued Bonus, et al.
2. ULIPS :
ULIPs are Unit Linked Plans
which are non-traditional plans wherein Returns are Market Dependent.
Under ULIPs, the Life
Insured is the Parent. If the Parent dies (or in some policies gets diagnosed
with Critical Illness), then the Child would receive the Sum Assured in Lumpsum.
Not only this, but the Future Premiums are also waived off (the Company pays
the same) and on Maturity, the Child would get the Fund Value too!’
ULIPs plans offer a variety
of funds ranging from Conservative to Balance to aggressive.
Under ULIPs, you can change
from Debt to Equity and vice versa without the worry of Taxation, thus enabling
you to benefit from both Timings the Market and Rebalancing your Portfolio.
Sadly, the charges are too
high in ULIPs. These ULIPs levy a variety of charges on your Child Plan by way
of Premium Allocation Charges, Policy Administration Charges, Mortality
Charges, Fund Management Charges, etc.
This would affect the
returns generated by investment in Market Related Instruments and ultimately
the Corpus that your child receives.
Another negative against
ULIPs is in case of emergency and you want to surrender or do partial
withdrawal, the charges are high and also attract Tax.
While a long Term ULIP
(above 15 years) could cost less than a Mutual Fund, flexibility is a huge
issue. You just cannot move from one ULIP to another ULIP as in case of Mutual
Funds.
Putting money in Child ULIP
plans is akin to putting all your eggs in One Basket!
If the ULIP underperforms
on a consistent basis, you are stuck!
I always say ULIPs are expensive products with high initial
charges. I am not in favor of any child plan. If one has enough term
cover that will do. Child plans are long-term gambles like ULIPs. How well an
insurance company manages your investment part is a gamble. These are all ways
to get more money from you. At maturity, you will realize that the returns are
not great. Better to keep INSURANCE & INVESTMENT separate.
ENDOWMENT POLICIES:
Endowment Policies are one
where lumpsum amount is paid at the time of the Maturity along with bonuses.
This type of Policy is very
useful to plan for your Child’s BIG expenses like Wedding, Higher Education,
etc
And, unlike ULIPs, there is
a minimum guaranteed amount of payment. Besides, you may get Bonuses too.
Endowment Policies too invest in Market backed securities, but unlike ULIPs,
they invest only in Debt products and the returns too are not exactly
spectacular.
There are two major
drawbacks with Endowments Plans
1.
The Returns are pathetic, with less than
double digits, and come nowhere even near Inflation, forget about the Education
Inflation which is in High Double Digits.
2.
The Insurance Cover too is almost always very
little. (If you require higher cover, you will obviously pay a steeper
premium).
If you do want to take up
an Endowment Policy, treat it as a Debt Portion of your overall Asset
Allocation.
Almost all Child Insurance
Plans cover the Parent and thus, if in an event of an unfortunate untimely
death of the Parent, the Child’s needs would still be taken care of by way of
Lumpsum payment on death and also on Maturity.
Child Plans are just Attractive Packages with
nothing inside.
Yes, on the untimely death
of Parent, some policies offer Waiver of Premium and the Policy continues but
this benefit comes at a high cost as the Premium increases due to this Rider.
And, Mortality Rate Charges for a Child Plan are quite high too.
Insurance should be taken
only for covering your Life and should never be taken as a part of Investment.
Never.
So, if the Child Insurance
Plans are not matching your needs, what is the Alternative??
The Alternative, my friend, is the COMBINATION OF TERM PLAN AND MUTUAL
FUNDS:
Term Insurance Plans are
the BEST way to cover your life as they are very affordable.
And Mutual Funds ensure
that you get Market Returns without the painful payment of High Charges which
you may have to bear in case of ULIPs.
So, in nutshell, my dear
investor, please remember that just investing in CHILD EDUCATION PLAN does not
guarantee you get the money you require for your Child’s education.
You need to invest in the
Right Asset Class after taking Protection through Life Insurance Cover.
If you are still a fan of
Insurance combo than, you are suggested to take a ULIP, especially if the goal
is at least 15 years away. But, do remember, that ULIPs may leave in
the false hope of adequate coverage as the Premiums will be steep as the Cover
goes up. They leave you Under-Insured.
Endowment and Money Back are a strict NO-NO. Investing in an Insurance Plan
which gives less than 7% when the Inflation is growing at 7% is definitely not
a wise thing to do.
T
he financial future of a child matters and mere emotions will not ensure a luminous career and life for the child. It has to be backed by a pragmatic and concrete financial plan so that dreams get translated into reality.
My Final Take is that there
is nothing to beat the Combination of Term Insurance Plan with Diversified
Mutual Funds.
And, yes, along with this
also invest in other products like Sukanya Samruddhi, PPF, etc
So, dear friends, selecting
the right plan for your child is NO CHILD’S PLAY
Please take the advice of a
Competent Financial Advisor.
Best of luck,
Srikanth Matrubai
CEO,
Srikavi Wealth
Certified Volatility Coach,
Author – Don’t Retire Rich
The views expressed here is the authors personal views and should not be intrepresented as a recommendation to invest/avoid.<div><br />
<div dir="ltr" style="text-align: left;" trbidi="on">Srikanth Matrubai
Author of the Amazon Best Seller <b><u>DON'T RETIRE RICH</u></b></div><div dir="ltr" style="text-align: left;" trbidi="on"><b><u><br /></u></b>
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