Insurance plans have been traditionally seen as the best bet to secure a child’s future. But there are more issues to keep in mind before opting for one
THINK of an investment avenue for securing the financial future of kids and, in all probability, it’s child insurance plans which will come to your mind first. Sure, among the various financial instruments designed to meet your child’s future financial needs, child insurance plans have over the years definitely been able to carve a niche for themselves. And not without a reason.
1) Child insurance plans cater to the various needs of your kids — whether that be higher education, marriage or any other future requirement, including the setting up a business of his/ her own. Particularly the soaring costs of higher education necessitate the building up of a safe and sufficient corpus for your child.
Child plans fulfill the educational needs of the child as well as create savings for other requirement like marriage, etc. Parents recognise the importance of a good education as a foundation for the success of their children and need solutions that allocate money in a planned manner towards this target. That’s where child insurance products come in. Thus, helping to create a safe and sufficient corpus and maturing at particular educational (or other) milestones are some of the unique features of child insurance plans.
2) child plans aim at securing the child’s financial future even when the parents are absent, ie. in case of death or disability of the parent/ guardian during the term of the policy. This is difficult to ensure through any other investment tool such as mutual funds, stocks or even PPF. In addition to covering risk, child insurance products ensure that the educational needs of the child are taken care of in the absence of the parents. In single income households, the risk of a secure future of the child is even greater.
3) it is true that many child plans, like other conventional insurance plans, give lower returns as compared to MF and stock market returns. But on the positive side they cover risk and also returns are safe. Besides, most investors are not savvy enough to invest in stocks and generate returns over a long term. They run a risk of destroying value instead of creating wealth
4) Branding also plays a critical role. For instance, parents can play with their own funds and may also take bigger risks in a bid to earn higher returns. However, they would hardly like to touch a fund or corpus which has been earmarked in the name of their kids. Similarly, taking a break from planned savings is unlikely. No wonder, child plans often do the trick which even other insurance plans fail to do.
The objective of creating a corpus for critical milestones in a child’s life can be fulfilled by other insurance plans too. However, by branding them as child insurance plans, parents get a clear-cut purpose and objective for investing and using the returns.
Today’s parents are particularly concerned about the financial security of their child because many of them believe their own financial futures were stunted by not investing early enough and in a planned way and, therefore, want to avoid the same mistake. And keeping their growing concern in mind, life insurance companies of all hues have come out with plans to safeguard the child’s future needs and requirements, taking almost all possibilities into account.
Another significant point to note is that while earlier child insurance plans were mostly available in the form of traditional endowment plans or money back policies only, these days even their ULIP versions have been unveiled to ensure higher returns. For instance, while SBI Life’s Scholar II is a traditional insurance plan that protects your child’s future educational needs, its Unit Plus Child Plan is a unit linked insurance plan which secures the child’s future by promising higher returns.
Moreover, lots of child plans are available with riders which can be attached to a basic plan. For instance, if the parent opts for an income-benefit rider, in case of his death, the plan provides a regular pre-determined income at every future policy anniversary to meet the education expenses.
It is also important to understand that in a child’s plan, it is not necessarily the child that is insured. In fact, there are two kinds of plans. One where the life assured is the child and second where the life assured is the parent. In the first where the life assured is the child, one would really wonder if it is actually important for the child to be insured as a child does not hold any financial responsibilities. Also, in case of any unfortunate event, the emotional loss for the family would be far more than the family getting the insurance money.
Yet another drawback of this plan is that a child receives the lump sum money when he attains 18 years of age. While this money could be used to fund the educational needs of the child, it could also be extremely risky for the child to receive the lump sum money in the absence of the parent. It is, therefore, advisable to take the second kind of child plan where the life assured is the parent these plans ensure that in case of the absence of the bread winner, the child’s needs such as education, marriage etc are taken care of.
While opting for a plan, you also need to look for the one that best suits the specific needs of yours as well as your child. For example, how old your child is and at what age you want the money to be available to him, how many years you want to pay for, how much you want to accumulate, whether for education only or for both education and marriage, the additional protection you want to build in, whether you want money back at predefined times or only at maturity, among others.
You need to ensure that the plan is highly flexible as it’s difficult to determine what your child’s future needs could be and at what stage would he require money the most. Another safe route is to look at the plans as long-term investments. As long-terms investments the policy will go through bull and bear phases. Also, a policy once taken should be kept alive. Only then the returns will be generated. Panic closure of policies during a bear phase will lead to losses.
But all said and done, you should never rely only on insurance plans to secure the financial future of your kid. Because besides giving comparatively lower returns, they also come with a big price tag.
It always makes sense, therefore, to create different pockets of investments so that even if one fails, there are others that will work. Investing only through an insurance plan is betting that the insurance fund manager will be the best performer over the long haul of 10 years or so. Besides, there are always factors such as his/ her moving out, statutory restrictions in investments, etc. that can affect the outcome of the policy and its returns.
After all, it should be well understood that planning for your kid’s future in a prudent way is not a child’s play!
CHECKLIST
THINK of an investment avenue for securing the financial future of kids and, in all probability, it’s child insurance plans which will come to your mind first. Sure, among the various financial instruments designed to meet your child’s future financial needs, child insurance plans have over the years definitely been able to carve a niche for themselves. And not without a reason.
1) Child insurance plans cater to the various needs of your kids — whether that be higher education, marriage or any other future requirement, including the setting up a business of his/ her own. Particularly the soaring costs of higher education necessitate the building up of a safe and sufficient corpus for your child.
Child plans fulfill the educational needs of the child as well as create savings for other requirement like marriage, etc. Parents recognise the importance of a good education as a foundation for the success of their children and need solutions that allocate money in a planned manner towards this target. That’s where child insurance products come in. Thus, helping to create a safe and sufficient corpus and maturing at particular educational (or other) milestones are some of the unique features of child insurance plans.
2) child plans aim at securing the child’s financial future even when the parents are absent, ie. in case of death or disability of the parent/ guardian during the term of the policy. This is difficult to ensure through any other investment tool such as mutual funds, stocks or even PPF. In addition to covering risk, child insurance products ensure that the educational needs of the child are taken care of in the absence of the parents. In single income households, the risk of a secure future of the child is even greater.
3) it is true that many child plans, like other conventional insurance plans, give lower returns as compared to MF and stock market returns. But on the positive side they cover risk and also returns are safe. Besides, most investors are not savvy enough to invest in stocks and generate returns over a long term. They run a risk of destroying value instead of creating wealth
4) Branding also plays a critical role. For instance, parents can play with their own funds and may also take bigger risks in a bid to earn higher returns. However, they would hardly like to touch a fund or corpus which has been earmarked in the name of their kids. Similarly, taking a break from planned savings is unlikely. No wonder, child plans often do the trick which even other insurance plans fail to do.
The objective of creating a corpus for critical milestones in a child’s life can be fulfilled by other insurance plans too. However, by branding them as child insurance plans, parents get a clear-cut purpose and objective for investing and using the returns.
Today’s parents are particularly concerned about the financial security of their child because many of them believe their own financial futures were stunted by not investing early enough and in a planned way and, therefore, want to avoid the same mistake. And keeping their growing concern in mind, life insurance companies of all hues have come out with plans to safeguard the child’s future needs and requirements, taking almost all possibilities into account.
Another significant point to note is that while earlier child insurance plans were mostly available in the form of traditional endowment plans or money back policies only, these days even their ULIP versions have been unveiled to ensure higher returns. For instance, while SBI Life’s Scholar II is a traditional insurance plan that protects your child’s future educational needs, its Unit Plus Child Plan is a unit linked insurance plan which secures the child’s future by promising higher returns.
Moreover, lots of child plans are available with riders which can be attached to a basic plan. For instance, if the parent opts for an income-benefit rider, in case of his death, the plan provides a regular pre-determined income at every future policy anniversary to meet the education expenses.
It is also important to understand that in a child’s plan, it is not necessarily the child that is insured. In fact, there are two kinds of plans. One where the life assured is the child and second where the life assured is the parent. In the first where the life assured is the child, one would really wonder if it is actually important for the child to be insured as a child does not hold any financial responsibilities. Also, in case of any unfortunate event, the emotional loss for the family would be far more than the family getting the insurance money.
Yet another drawback of this plan is that a child receives the lump sum money when he attains 18 years of age. While this money could be used to fund the educational needs of the child, it could also be extremely risky for the child to receive the lump sum money in the absence of the parent. It is, therefore, advisable to take the second kind of child plan where the life assured is the parent these plans ensure that in case of the absence of the bread winner, the child’s needs such as education, marriage etc are taken care of.
While opting for a plan, you also need to look for the one that best suits the specific needs of yours as well as your child. For example, how old your child is and at what age you want the money to be available to him, how many years you want to pay for, how much you want to accumulate, whether for education only or for both education and marriage, the additional protection you want to build in, whether you want money back at predefined times or only at maturity, among others.
You need to ensure that the plan is highly flexible as it’s difficult to determine what your child’s future needs could be and at what stage would he require money the most. Another safe route is to look at the plans as long-term investments. As long-terms investments the policy will go through bull and bear phases. Also, a policy once taken should be kept alive. Only then the returns will be generated. Panic closure of policies during a bear phase will lead to losses.
But all said and done, you should never rely only on insurance plans to secure the financial future of your kid. Because besides giving comparatively lower returns, they also come with a big price tag.
It always makes sense, therefore, to create different pockets of investments so that even if one fails, there are others that will work. Investing only through an insurance plan is betting that the insurance fund manager will be the best performer over the long haul of 10 years or so. Besides, there are always factors such as his/ her moving out, statutory restrictions in investments, etc. that can affect the outcome of the policy and its returns.
After all, it should be well understood that planning for your kid’s future in a prudent way is not a child’s play!
CHECKLIST
- The objective of child insurance plans is not to provide insurance to children but to create a corpus for them
- The money can be used at critical milestones for funding studies, business or marriage
- Child plans aim at securing the child’s financial future even when the parents are absent
- To make the plan meaningful, the earning members of the family need to be adequately insured
- One should take the child plan where the life assured is the parent Child plans give lower returns & also come with a big price tag
