By Mr.
Sridharan, Fundsindia.com
As a parent, you must
have paid a sizeable sum of money as donation for your kid’s admission in
school.
Rising costs of
Education..
Besides this, you
also have to regularly pay a certain sum of money for your child’s fees, and
additionally, you have to save for his / her higher education too. However,
with rising costs of education, it is quite likely that inflation has been
eating into your savings.
For example, today,
the cost of an engineering course in India is about Rs. 8 lakh.
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| Mr. Sridharan, Fundsindia.com |
After ten years, it
could cost nearly Rs. 33 lakh, assuming inflation at the rate of 10 % every
year. This is a modest estimate considering how according to a recent survey,
the cost of education is increasing at 15% to 20% on a yearly basis.
To combat inflation
and save effectively for your children’s education, term insurance, along with
disciplined investments in mutual funds, are important tools.
Main advantage of
children’s ULIP
There are also a few
children’s Unit-Linked Insurance Plans (ULIPs) that are being offered by
insurance companies that help you save effectively for your child’s higher
education.
The main advantage of
children’s ULIPs are that they offer individuals a triple advantage, along with
high insurance coverage, disciplined investments, and participation in the
equity market along with the choice of a rider option.
Triple advantage
means that at the eventuality the sum assured is paid to the nominee, the
future premium is waived off & the maturity value would be paid at the time
of maturity, ensuring that your children’s future dreams are fulfilled.
All of the above
advantages come with a little higher cost in the initial years. These costs
were drastically reduced after the IRDA changed regulations in September 2010.
All the policies that were launched after September 2010 have lower costs
compared with the ones launched earlier.
However, if the
investment period is long and one is investing in a well disciplined way, the
costs tend to be covered, given that one gets to participate in the equity
market over the long term.
Therefore, children’s
ULIPs are recommended only for those individuals who have a time frame of 10
years or / more.
These policies are
also reasonably transparent in terms of where they are investing, their charges
& also offer varied asset allocation, along with a few free switches, where
one can change the asset allocation depending on the market condition.
One main disadvantage
of ULIPs is that surrender charges are hefty during the initial years.
This is to encourage
investors to keep the policy on hold till the maturity date which will bring in
discipline in investments.
Term plan + MF Vs
Children’s ULIP
The important
difference between a term plan plus a mutual fund (MF) combination versus a
Children’s ULIP is that the earlier one offers a high cover at a low cost &
gives out a lump-sum amount to the nominee, if the policyholder dies. But, the
policy ends right there.
On the other hand, a
children’s insurance plan offers a lump-sum payment on the death of the
policyholder, but the policy does not end. All future premiums are waived and
the insurance company continues investing this money on behalf of the
policyholder.
Thus, a children’s
ULIP ensures that your child’s dreams are fulfilled, no matter what your child
wants to be, no matter what the cost of fulfilling it, no matter what the
circumstances are.
Comparitive Study –
Children’s ULIP vs. Term Insurance and Mutual Funds
Let us consider the
case of 32 year old Mr. Raja who has a three year old daughter. He wants to
plan for his daughter’s higher education, the time for which is 15 years from
now.
The above
illustration is based on a term plan and a child plan offered by Kotak Life
Insurance Company, which have investments in large and mid-cap assets. In both
cases, the return assumed is 8 %. The MF used in this illustration belongs to a
similar category. In both the cases, the return assumed is 8 % CAGR.
For Contact
Mr. Sridharan.S
Head - Financial
Planning
Mob: +91 99401 16967
Tel : 044 - 4344 3142
Email :
sridharan@fundsindia.com
+91 7667 166 166
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