When parents say, “We want our children to have the best education at all costs,” they really mean it. If cost is not a factor, they should save the right way for their child’s educational needs. However, with the rising cost of education and uncertainty in the funding process, meeting them is not easy unless you have a proper plan in place.
Various investment options such as public provident funds, mutual funds, stocks, gold, real estate, etc. are self-funded in nature. You have to be alive to keep investing in them to accumulate wealth. But, upon death, the funding would in all likelihood stop and the goal could be compromised. A better alternative is therefore the children’s insurance scheme, which is also self-financed, but in the absence of the parents, the insurer finances the policy. These insurance plans are structured to help meet the educational needs of the child.
Only a children’s insurance plan can ensure that funds as needed and as needed by the child can be accumulated. In the event of the death of the insured parent, the scheme ensures that the desired sum is given to the child at the desired age, neither sooner nor later. Also, in the absence of the insured parent, the insurance company begins to fund the policy. This ensures that the savings plan for the children’s needs does not go off the rails.
“A children’s insurance plan is designed to meet the financial needs of your children, whether it’s college, marriage or starting a business. Investing in children’s insurance plans means that the payouts, including the death benefit, from such a policy should only be used for the needs of the child. Children’s insurance plans help you save regularly for your child’s needs, while ensuring that your children’s financial needs are taken care of, in case something unfortunate happens,” says Sanjiv Bajaj, Jt. Chairman and Managing Director, Bajaj Capital Ltd.
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In the event of the death of the insured parent, the scheme ensures that the desired sum is given to the child at the desired age, neither sooner nor later. Unlike any other insurance plan, a children’s plan is unique because it continues even after the death of the insured. This happens because in the absence of the insured parent, the insurance company begins to fund the policy. This ensures that savings do not go off the rails. This is possible because children’s plans have a feature called “waiver of premium” (WOP).
If you’re buying a life insurance plan to meet the needs of children, make sure it has a “waiver of premium” feature. The peculiarity of children’s insurance plans is that the applicant receives twice the desired amount in the event of the death of the insured. The insurer pays the sum insured to the representative immediately after the death of the policyholder. But, even after this payment, the company begins to pay the premiums into the policy on behalf of the policyholder. This money keeps growing and is returned to the candidate once the policy has expired. In this way, the policy ensures that funds are available for the child at two stages of their life.
In most of these plans, regular payments occur at a specific age of the child. A fixed amount is received during different time intervals which can be mapped and used for child rearing, marriage needs which arise at different time intervals. On the death of the policyholder, the insurer immediately pays the sum insured to the representative or the family. But the plan does not stop. The insurer keeps the plan active by paying premiums for the duration of the policy. This money keeps growing and is returned to the candidate at maturity. This ensures that the child/applicant receives the necessary funds at the correct age of the child.
In most child plans, WOP is a built-in feature, while in others it can be added as an add-on for an additional fee. You can choose between a capitalization plan and a Ulip. An endowment plan is a profit-based or bonus-based plan and therefore the performance of it largely depends on the profits and surpluses generated by the insurer. Since the funds are mainly invested in fixed income assets, their return is around 6% per year. If your risk profile, given planning for your children, does not allow you to take risks through equity exposure, bonus-based endowment plans are best for you. However, if you are prepared to put up with the volatility, Ulips, whose returns are linked to the market, would make sense and especially when the need for the child is at least ten years old. Choose to stay invested in the equity fund option until you are three years away from the maturity year.
“Equities perform better than other asset classes over the long term. When considering a child insurance plan, make sure it has a WOP feature. This WOP guarantees that the premiums are canceled in the event of the death of the insured while the policy continues until its initial duration. If the insured (parent) survives the policy, the sum insured and premiums are paid to the applicant as a survivor’s benefit, while in case of Ulips, the parent receives the fund value. Many companies have plans that offer multiple payment functionality, i.e. at specified time intervals the company pays a certain amount which can be used to finance various important events in the life of the child. And, if the insured survives the term of the policy, the company pays the sum insured as agreed when signing the policy,” Bajaj informs.
As a general rule, consider investing for the needs of the child when planning a family begins or when the new baby arrives in the family. The right time will be when the kids are small, and your savings will help build a proper corpus for them to reap long-term benefits. The cost of education has increased, especially for higher education. Education inflation is estimated to be double that of general inflation which is currently around 6% per year.
Consider the cost of the courses on the menu. An MBA from any of the Indian Institutes of Management (IIM) would cost more than Rs 15 lakh here and a minimum of Rs 20 lakh abroad. For undergraduate engineering courses, the fees could be Rs 5 to Rs10 lakh, while for a five-year medical course at a private college, it could be up to Rs 50 lakh. To meet education needs, investments for education, including mutual funds, insurance, and term deposits, are being liquidated. Sometimes parents fail and find a gap in funding a child’s education. A student loan fits in here and bridges the gap, but then why depend on the loan and pay interest when you can fund your child’s needs yourself?
“Many argue that a term plan and a mix of mutual funds can serve the purpose. While investments in mutual funds would help meet educational needs, proceeds from a term plan can help weather the situation in the event of death. This may not work in all situations. There is a higher probability that the sum assured of, say, Rs. 21 lakhs, when the child is still small, will be spent on other expenses rather than his special educational needs. To ensure the right amount is there for children at the right time, a children’s plan with WOP is the perfect solution,” says Bajaj.
Unit-linked child plans will be better than traditional child plans, especially when the need for funds is at least ten years. Child plans with WOP are expensive compared to normal plans, but for a reason. The supplement paid serves to guarantee that the child receives the agreed amount at all costs. Children’s insurance plans with WOP function ensure that the child receives the desired amount at the desired age. When it comes to meeting the needs of children with more certainty, one would not like to take risks, so choose to make the dreams of the little ones come true with a children’s insurance plan.