"Parents need to decide on the financial plan to support their child's education and choose a lump sum benefit or a money back plan accordingly"- Srinivasan Parthasarathy, senior executive vice president, HDFC Life
"Financially literate customers with a long-term view and who are willing to accept the risk associated with equity markets can opt for unit-linked plans as they usually offer better returns over the long term" - Sanjay Tiwari, executive vice president (product management), Exide Life Insurance
"Initially I had taken a unit-linked plan for my children, but I felt that it did not give me the returns I had expected" - Vasant Bhat, Tumkur, Karnataka
Delhiite Ashutosh Upadhyay, 41, has been concerned about the cost of his children's higher education ever since they were born. The human resources consultant is convinced that higher education is bound to get expensive and he needs a corpus to cover that. His daughters are only nine and three, but he has already taken a plan from HDFC Life Insurance which combines bond and stock. It was the guaranteed returns from the plan which attracted him. He has started with an annual premium of around Rs 1 lakh and the plan will mature when his elder daughter turns 16.
Owing to the ever-escalating cost of education, planning for it has become essential. Gone are the days when investment for children was restricted to the traditional modes like Public Provident Fund (PPF), fixed deposits and National Savings Certificate. They earned a reasonable return and needed minimal planning. Today, however, the key is to start early and have a disciplined approach to save for the long term. This is where a child insurance plan has an edge over other financial tools, thanks to the unique benefits it offers.
Vasant Bhat, 42, of Tumkur near Bengaluru, is a freelance translator, and his children are 16 and 12. He has taken an endowment children plan from Exide Life insurance. “I cannot be sure about my life and I do not feel that everyone lives till 100 years to take care of his children and other priorities in life. Initially I had taken a unit-linked plan for my children, but I felt that it did not give me the returns I had expected. So now I have switched on to an endowment plan for my children which will have fixed returns. This plan will not have any risk factors and I will get an assured bonus,” he said.
“A children’s plan allows parents to start investing early and encourages long-term disciplined saving. The greatest advantage that a child insurance plan offers is the premium funding benefit in case of an unfortunate event. Besides offering a lump sum payment to the beneficiary, the insurance company continues investing money on behalf of the policyholder, thereby securing the child’s future. A child insurance plan ensures a continuous cycle of fund creation in the event of an early or sudden death of the parent,” said Sanjay Tiwari, executive vice president (product management), Exide Life Insurance.
The cost of raising a child has significantly gone up with expenses such as day care, school fees, hobby classes, tuition and transport. “One is required to meet these monthly costs and has to set aside a sum for building corpus for higher education and professional courses. Though a major part of the cost of professional courses can be met through education loan, a sizeable part of peripheral expenses needs to be provided for,” said Rituraj Bhattacharya, head of product development at Bajaj Allianz Life Insurance.
According to him, a significant challenge is deciding on the corpus that the child may need, as it is difficult to anticipate what interest the child might develop. “Also, the timeframe within which this corpus needs to be built is relatively short. This adds to the challenge,” he said.
While one can delay the other life goals like a foreign vacation or a luxury car, planning for a child’s education cannot take a back seat. “Given the uncertainties of life, it is important for one to start saving today. Remember the times when average school fees were a three- to four-digit figure and when graduation was all you needed to get sufficient salary? Those days are long gone. With ever-increasing competition, a basic degree is not enough to secure a job and financial inflation coupled with academic inflation has resulted in exponential growth of education cost in India,” said Abhay K. Raj, head of product management at SBI Life Insurance.
Insurance experts often cite the statistics of the National Crime Records Bureau to prove their point—an Indian dies in an accident every 90 seconds. Those who are crippled are many more than that. “A person’s earning capability may be hindered due to an accident. What if that person is the sole breadwinner of the family? How will the family sustain now? This fear can be avoided if one is insured for permanent disability,” said Raj.
Many child plans come with a permanent disability rider. “In case of permanent disability due to accident, the child receives the sum assured on death. Also, the future premiums are waived off in this case or if the life assured dies before end of the policy term. Along with the death benefit, maturity benefit is also paid in such cases, on completion of the policy term. Other saving and protection instruments may not be able to take care of financial needs of a child, as the lump sum received would be one-time receivable and could be used for the immediate needs or may be exhausted in due course of time. In such circumstances of unfortunate event, it is pertinent that the funds intended for child’s education is safeguarded against other expenses,” he said.
Parents, however, are often baffled by the many plans available in the market and struggle to figure out what they offer. One can calculate how much one needs to invest by looking at the current cost of education and factoring in the inflation component and the current savings.
There are broadly two types of plans available in the market depending on the frequency of the payouts. Plans that provide a lump sum benefit at maturity can be used if you want to fund the college or the university fees of your child. Regular income plans, which are basically money-back plans where payouts are made annually, can be helpful in meeting key financial needs in your child's education. “Parents need to decide on the financial plan to support their child's education and choose a lump sum benefit or a money back plan accordingly,” said Srinivasan Parthasarathy, senior executive vice president, HDFC Life.
Depending on one's risk taking appetite, one can choose whether to invest in traditional plan or a unit-linked one. However, before choosing doing that, a parent needs to be warned about potential pitfalls. “One of the critical mistakes that is commonly observed is that, due to emotional reasons, parents tend to buy a plan where the child is proposed as the insured. But it should be noted that the child should always be the beneficiary of the plan and insured should be the premium payer [either of the parents] so that planned corpus is always available to the child. Secondly, child plan is not just about the planned corpus, but also about the comprehensive financial security it offers in case of unfortunate situations and investment risk. Ideally, a child plan should be a balance of protection and investment returns,” said Bhattacharya.
Also, parents often delay financial planning to a later stage, and typically invest for short-term periods. Planning at an early stage is an important step in this process and one should invest for a long term for the child’s future. “Child insurance plans are affordable, and depending on individual risk appetite parents can choose between a range of traditional and unit-linked insurance plans. A traditional child insurance plan typically provides guaranteed maturity returns and an opportunity to earn bonuses. Unit-linked plans, on the other hand, allow for investment in both debt and equity markets. People with a low risk appetite prefer traditional plans as they get the security of guarantees. However, financially literate customers with a long-term view and who are willing to accept the risk associated with equity markets can opt for unit-linked plans as they usually offer better returns over the long term,” said Tiwari.
Many child plans offer waiver of premium benefit in case of death or disability of the insured. In such cases the sum assured under the plan is paid immediately. And all future premiums under the policy are paid by the insurance company and fund value at the end of policy term is given to the child to meet educational or any other financial requirement. New unit-linked child plans are being offered by companies which give the option to invest in debt or equity.
PLANS ON OFFER
Youngstar Udaan is offered on a conventional platform and Youngstar Super Premium is offered on a unit-linked platform. Both these plans offer waiver of premium benefit on death of the insured.
EXIDE LIFE INSURANCE
Wealth Maxima is a unit-linked insurance plan that aims to maximise one's wealth while securing the child’s future. The plan allows one to invest on a periodic basis and benefit from the market opportunity. Depending on one’s risk appetite, one can choose one of the different investment strategies. One can invest in equity and debt fund or opt for an active asset allocation style of fund management where the money is allocated with more agility in asset classes gaining strength. Or choose an automatic asset rebalancing where in the early years one has high equity exposure and gradually reduce to debt as one’s policy progresses to maturity. This plan also provides financial security to the child in case of an unfortunate event. The premium funding benefit pays an amount equal to the sum assured and all future premiums are funded by the insurer. On maturity the fund amount is paid.
New Creating Life Plans are traditional ones designed to offer financial security for children’s goals. One has to pay regularly over the policy term and ensure one's child gets the sum assured along with applicable bonuses. In case of any unfortunate event, all future premiums are waived off and one's family receives life cover not only in lump sum but also as income for 60 months. On maturity, the corpus can be utilised for fulfilling the child needs.
BAJAJ ALLIANZ LIFE INSURANCE
In Life Young Assure, the insured can be either of the parents and in case of death of the insured, the sum assured will be immediately paid and all future premiums will be waived, thus at maturity of the policy the maturity benefit, too, will be available for the child. This plan also offers waiver of future premiums in case of total accidental disability of the insured. The insured under this plan can also add a rider for waiver of future premiums in case of critical illness. The plan has multiple cash instalment options to choose from so that maturity benefit is available when required.
Smart Champ Insurance is a traditional, participating life insurance plan designed to protect children's educational needs. It provides benefits in four equal annual instalments after the child turns 18. Each instalment will consist of 25 per cent of the basic sum assured and 25 per cent of the vested simple reversionary bonuses. Terminal bonus, if any, will be paid along with the last instalment of smart benefits. This plan ensures that the a child’s higher educational needs are met.
Smart Scholar is a unit-linked insurance plan, which aims to secure a child’s future by gaining from financial markets. This plan provides loyalty additions during the policy term, which in turn boosts the corpus available for a child’s education.
LIC OF INDIA
New Children’s Money Back Plan is a participating non-linked money-back plan specially designed to meet the educational, marriage and other needs of children through survival benefits. In addition, it provides for the risk cover on the life of child during the policy term and survival benefits on surviving to the end of the specified durations. The plan can be purchased by parents or grandparents. In case of the life assured surviving the policy anniversary coinciding with or immediately following the completion of ages 18 years, 20 years and 22 years, 20 per cent of the basic sum assured on each occasion is paid if the policy is in full force.