Life insurance plays an important role in an individual’s financial planning exercise. Insurance can assist individuals in planning for their own life stages as well as provide for their children’s future.It also secures a child’s future in case of any unfortunate event.
Various kinds of child insurance products are available in the market.Child insurance plans play an important role in securing a child’s future.With a number of children’s insurance plans available in the market, it becomes difficult for most parents to evaluate them objectively.
This will define the premium and policy term. All parents dream that their child gets the best possible childhood and a safe and secure future.Yet Sometimes due to sheer negligence or laziness, parents are unable to offer their children a well laid out financial platform to pursue career ambitions.Parents need to build a sufficient corpus for their children.
They should start planning for their children at an early age. One of the biggest financial commitments for parents is to meet the expenses incurred in bringing up and settling their children.With a suitable life insurance plan, decide the corpus you wish to provide for your child’s future and the time when the same should be made available.
The Indian insurance industry has seen many changes since the sector opened up in 2000. The private life insurance companies have also changed the way insurance is sold in the country. From being a tax savings tool, insurance is now being bought to satisfy specific needs like creation of a fund for a child’s education, saving for one’s retirement and so on. Insurers have introduced innovative products and a need based sales approach wherein only those products that satisfy customers’ needs are recommended.
Your child may want to be a doctor, an engineer or a pilot tomorrow. As a parent, you want to ensure that he/she is provided with the best education, which entails high cost and needs a large corpus. You may think that you have enough time to save for the same. However, for each year that you delay saving, you will need to invest a larger amount to secure your child’s future. Your first step should be to identify and priorities your goals and the monetary value attached to them. In short, you should be able to make estimates of the amount you intend to spend on your child’s education or marriage.
Plan your Child’s Future:
Life insurance plays an important role in an in an individual’s financial planning exercise. Parents need to build a sufficient corpus for their children. Are you comfortable telling your children that 15 years hence you would be there to take care of their financial needs? Wouldn’t you rather guarantee that their future is safe, whether you are there or not? Life insurance helps provide that guarantee.
Not only do such products provide financial protection for your family in case something unfortunate happens to you, they also have a savings element for your long-term needs. Education of your children is top priority. The other area which requires maximum attention and planning from the parent’s side is marriage, the cost of which has also increased significantly. The market today is flooded with child insurance plans, some even providing coverage from the day a child is born.
To help you make the right choices on child insurance plans, plan their future with due-diligence. Considering that you would need a corpus of Rs 10,00,000 for your child’s education, if you start saving when your child is less than 1 year of age, you would need to pay a premium of Rs 39,771 yearly. If you can pay, start now. However, for each year that you delay saving, you will need to invest a larger amount to secure your child’s future.
Combat Financial Voltality:
Previously, providing for the child was to just set aside some amount of money in a savings bank account or making fixed deposits with the intention of using the maturity amount. Children’s insurance plans aim at providing for meeting expenses of children – education, marriage etc. According to the latest survey on saving habits of urban parents, investment in education is the topmost priority for Indians and a key reason for saving.
The survey reveals that college education ranks the highest concern for 93% of parents saving for child’s future. Almost 77% parents feel anxious about the cost of higher education which is slated to grow at a far higher rate owing to rise in inflation and feel that it requires panning at their end. So how do parents combat financial volatility given the current economic scenario? Well, the answer is fairly simple. One has to be smart while planning investments for future.
The key to successful planning of a child’s future is in starting early and assessing the needs carefully. After you zero in on the time frame, you should then work with your financial planner or on your own about what would be the annual investment required to get the desired sum of money at maturity. Most of the illustrations by insurers are based at 6% or 10% return assumption. Choose 10% if you are an aggressive investor and 6% if you are a conservative investor.
Buy early and Adequate Cover:
Delayed planning has been one of the key reasons for shortage of funds. With the average cost of pursuing higher studies going up significantly in recent years, the importance of having a perfect financial plan to secure your child’s future has become essential. Many a time, pure risk products are bought as a ‘ritual’ without digging deeper into the need-benefit analysis – how much insurance one needs to buy and what benefits a policy affords the buyer.
One should buy adequate amount of insurance depending on the human life value. Some prefer to buy risk cover of an amount equal to the liabilities outstanding. You must ensure that the policy you are buying is on the life of you (the parent) and must have a waiver of premium built-in to ensure continuity of future premium, even in case of your death during the term of the policy.
This will eventually assure the corpus for your child at maturity under any circumstances. The most important thing to keep in mind is the objective of investment before taking any decision. One of the best ways is to create a bucket for each of the objectives.This will ensure that you do not deviate and miss the objective.It is a known fact that inflation reduces the purchasing power of money and no matter how well you plan, there are chances that the fund you have marked for your children may be insufficient for future needs. Imagine, the child is five years’ old and you estimated a cost of Rs. 10 lakh for his higher education.
The value of Rs. 10 lakh will be much lesser when the child actually needs the money, which means the requirement will be far higher. As a parent, you should inculcate the concept of savings and value of money in your children. You need not start straight with investment products as awareness is important. It is also important to involve children as you are planning for his/her future and you need to understand their interests. You also need to make them responsible for their decisions and plan their career.
Ideal Child Insurance Plan:
Children’s plans are usually costlier than other types of market-linked plans. The primary reason for this is the mortality charge levied on the sum assured and the value of the future premium. An ideal child insurance plan should be started from 90 days of the child’s birth, the earlier one starts the lower the risk and higher the investment period. A minimum tenure of seven years is considered important for the plan.
The factors to be kept in mind include the timeframe for building a corpus, age at which the funds would be required, approximate amount needed to build the corpus, investment avenues to be considered and the amount available to the child in case of death of parents. Choose the level of protection you require. This should be reflected in sum assured and the riders (like income benefit, comprehensive health benefit and accidental death benefit that you choose.
This would ensure that no matter what happens to you, your child’s future is secure and his education is not affected. Your child may want to be a doctor, an engineer or a pilot tomorrow. As a parent, you want to ensure that he/she is provided with the best education, which entails high cost and needs a large corpus. You may think that you have enough time to save for the same. One should be more careful examining the features of a child plan. For instance, since a child has no dependants, buying a plan in their name makes no sense.
Synchronize your Aims & Product:
All parents dream that their child gets the best possible childhood and a safe and secure future. Yet sometimes due to sheer negligence or laziness, parents are unable to offer their children a well laid out financial platform to pursue career ambitions. There are various plans available in the market, with options like premium waiver – so that the policy continues even in case of the parent’s death, disability or critical illness, while the sum assured is paid out.
Parents should always attempt to provide for their children’s future by selecting a children’s plan that will yield funds at the right time. Children plans are immensely popular. Almost all insurance companies – public and private – offer children’s insurance plans. Income Benefit plans also provides regular income to meet the child’s everyday expenses in case of the parent’s death. On maturity you get the fund value. Once again, while the key to successful planning for future is to start early, at the same time, it is never too late to get started.
As a policy buyer, your first step should be to identify and prioritize your goals and the monetary value attached to them. In short, you should be able to make estimates of the amount you intend to spend on your child’s education or marriage. This will help you choose the premium amount and the policy term.
Generate Funds for Future Needs:
You should consider a child endowment plan if his risk profile is low and he wants the plan to mature at ten years. Though the downside is low returns, but it covers one against uncertain market conditions. Similarly, one must look for a unit-linked child plan only if the risk profile is moderate to high and remaining invested for more than ten years is possible. As inflation rises, the first impact is on the education sector. Planning for a child’s future is an important step. It is advisable that parents go for a term policy.
That will take care of the child’s financial needs in case of untimely death of any of the working parents. For the child’s future, one can create a specific financial plan through SIP (Systematic Investment Plan) in mutual funds. Choose the premium, premium payment term and frequency. With the costs going up sharply, it makes sense to plan for insurance well in advance so as to enable provision of adequate funds at the time they are required. It also tends to provide a sense of relief and security for the parents – that they won’t be out of funds as an when they are required the most. Choose the funds you want to invest based on your risk appetite.
The asset allocation can vary with time and you should diversify your child’s portfolio accordingly. For instance, if your child is young, say five years of age, and you are planning for his higher education or marriage, you can have a higher equity asset allocation. Similarly, if he/she is 15 years old, probably you can have a moderate portfolio with a combination of both debt and equity for meeting his higher education needs. If it is not wedding, he/she can have an aggressive portfolio with higher equity assets as the investment will work for a longer period of time.
How Child Plan Works:
Decide the corpus you wish to provide for your child’s future and the time when the same should be made available. This will define the premium and policy term. Choose the level of protection you require. This should be reflected in sum assured and the riders like income benefit, comprehensive health benefit and accidental death benefit, that you choose.
This would ensure that no matter what happens to you, your child’s future is secure and his education is not affected. Choose the premium, premium payment term and frequency. Choose the funds you want to invest based on your risk appetite. Considering that you would need a corpus of Rs 10,00,000 for your child’s education, if you start saving when your child is less than 1 year of age, you would need to pay a premium of Rs 39,771 p.a. However, if you start saving when your child is 7 years old, you would need to pay an annual premium of Rs 82,045.
This means, that you would end up paying an additional sum of Rs 42,274. Child plans not only fulfill the investment objective, but also provide protection in case something unfortunate happens to the parent. This is the only product that ensures that the corpus that you have planned to save for their child’s future is available when your child is 18 or 21 years old. The choice of product, however, depends on the risk appetite of parents.
Building Adequate Corpus:
Unlike other policies, most children’s plans require premiums to be paid for the full policy term. So if you stop paying premiums after three or five years, the policy could lapse unless you inform the insurer in writing or it will have a low corpus at maturity. In all, you may miss out on the loyalty additions that improve the overall return on maturity in many plans. Parents with some risk appetite can opt for a ULIP child plan that invests across equity and debt markets.
Over the long term, equity can add considerably to the corpus you plan to build for your child’s needs. Equity is best-placed to beat inflation over the long term. However, to achieve this, you must invest wisely. Debt, on the other hand, brings stability to a portfolio.
While the returns from debt at times may seem unattractive as compared to equity, its importance in a portfolio cannot be understated. Apart from these, you must see that the policy’s term is flexible and matches the education or marriage milestones of your child’s life. Parents can either opt for a regular traditional endowment plan which carries relatively lower risk since it is invested mainly in corporate bonds and government securities. The bonuses are stable and give the parents considerable comfort knowing roughly how much they can expect. Regular endowment plans are suited for parents with a low risk appetite.
The things have changed now. Now, parents take a term cover in their name, which would be replaced if there is any loss of income due to the untimely death of any of the earning parents. So, it has the twin benefits of investment and protection.
One can either invest in traditional child plans or unit linked insurance plans (ULIPs). Traditional plans invest a major portion of their money in debt instruments like corporate bonds and government securities. ULIPs can invest across equity and debt markets in varying proportions.
Term insurance products are relatively ‘difficult’ to buy due to rigorous medical check-ups and other underwriting requirements compared with other participating products, due to the high risk involved. Earlier, only simple Money-back plans were taken in the name of the child. The policy used to provide fixed cash inflows at fixed time intervals. While you can invest in a good diversified equity or balanced open ended scheme, some fund houses also have children specific funds which come with a lock-in-period.
It is not possible to withdraw from these schemes before the specified tenure. Some of these funds even provide additional life insurance cover. For families where both the partners are working, special arrangements would have to be made for the child’s security. Further, these kids may find it difficult to earn their livelihood when they grow up. So the parents have to ensure that such a child has access to adequate financial resources during his entire life.
Whatever be the tool, there is a need to clearly understand the need of insurance and ascertain the quantum. Go for an amount that would fetch you peace of mind and more important you can afford it, not just in first year, but for the entire term of the policy. If you want to buy a policy in the child’s name, the waiver of premium rider should be attached. The rider ensures your child doesn’t have to pay premiums on your death and he still enjoys the policy benefits.
This mortality charge is essential as it provides life cover. One can however go for direct investments and buy a pure term insurance with a high cover as an option. Typically, it will work out more effective, but one needs discipline. On the whole, an equity-based plan, with a capital guarantee feature, should be favored so that your money is not subject to volatility of the capital market.
The rationale is that in such a situation only the fund value accumulated till date shall be paid off to the individual in case one has opted for an investment route, whereas in case of a child insurance plan, the child will get the corpus as planned earlier by the parents. Many life insurance companies and financial planning websites offer calculators to that effect. There are many investment options available to parents today to plan for their child’s future needs and choosing the right ones is no child’s play. Hence, picking the right combination based on your disposable income, cost factor, risk appetite, time available and future needs is of utmost importance.
By: Jagendra Kumar, Published in Life Insurance Today, January, 2011
