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 do not 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-Ã -vis alternative investments such as mutual funds (MFs),Public
Provident Fund ( PPF) and understand the pros & cons of choosing either of
them.
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| Yashish Dahiya, Policybazaar.com |
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 insurance 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 MF or 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 MFs. 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 premiums.
* 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 & 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
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