JOIN USThe cost of raising a child has gone up tremendously and parents are well aware of the need to save at the outset to ensure that the child’s wellbeing and aspirations are not hampered for want of finances.
That said, the plethora of choices in the form of child plans makes it all the more necessary to pick the right one among the many available. Here are six things you must keep in mind while buying a child plan.
Check its alignment to your child-related goals: Start working on a financial plan for the child the moment you welcome him into your world. It’s true you won’t know what your child wants to be when he/she grows up, but, for a start, look at all the higher education options of your choice and their maximum costs, so that you get a basic idea of the finances involved.
Some plans pay at important milestones during your child’s growing up years.
If you are confident that you will be able to save the desired amount even with moderate returns over a given period, then buy a traditional child plan.
But if the target amount is a bit challenging, or, you wish to save more than your target amount, then buy a Ulip child plan which invests in equities to take advantage of its growth prospects.
Explore if it provides investment flexibility: The more time you have to reach your goal, the higher is investment risk you can afford to take. But as you approach closer to your goal—child’s college or wedding, the more you should try to conserve your accumulated capital.
Likewise, you should also start increasing your investment along with a rise in your income to accelerate your savings. So, you need to ensure whether your child plan allows you the flexibility to manoeuvre your investments to suit your needs.
Some plans come with an option of systematic allocator that provides a higher equity exposure to your investments initially, gradually reducing it as you approach closer to your child-related goal.
Verify if it suits all your protection needs: Make sure that the child plan you are buying will provide protection to the child’s future goal in the event of the untimely death of the earning parent.
Many plans come with facilities like Education Support Benefit, which allows comprehensive support to the child in case of loss of parent, and even provides funds partially each year, starting four years prior to the plan’s maturity.
Besides the core protection for life, child plans also come with additional protection, such as riders for premium waiver. Upon the death of the earning parent, the plan provides the sum assured to the family while simultaneously waiving off the future premium payment requirement.
Evaluate the costs and rewards: After the recent overhaul of the cost structure by the IRDA, the new insurance plans, whether traditional or Ulips, have now become very cost effective.
A Fund Management Charge of 1.35% makes them highly competitive even when compared with mutual funds and is better than many mutual funds. As your cost goes lower, your return becomes higher.
Besides, there are loyalty benefits if you stay invested for the long-term, say, for 10 years, which further enhances your returns. For instance, a saving of Rs 5,000 per month with 8% annual return could fetch you up to Rs 29.45 lakh in 20 years.
But, if the return increases to 9%, keeping everything else same, you could save up to Rs 33.39 lakh, which is almost 10% higher.
Find out if it helps long-term savings and yet provides liquidity: Traditional plans come with a time period of 2-3 years to attain guaranteed surrender value while Ulips come with a lock-in period of five years.
These aspects help the investor stay invested for the long-term in such plans. Besides, traditional plans provide loan facility of up to 85% of the surrender value and Ulips allow partial withdrawal of up to 20% of the fund value after the initial lock-in period of five years. Typically, surrendering a policy or going in for partial withdrawals should be avoided except in case of an emergency.
Consider the credibility and track record of insurer: Before investing your money, do a check on the insurer’s credibility and track record, especially for claims settlement.
As a parent, your primary concern should be to ensure that the plan provides benefits promised to your child if you are no longer there. For this, you should check the claim settlement ratio of the child plan provider.
To conclude, while all child plans promise you to take you to your promised destination of a secure future for your child, you need to do homework to find out the best one for you.
(The writer is CMO, Head Products & Strategy, IDBI Federal Life Insurance)