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Protect Your Child

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Protect Your Child
Protect Your Child
Nirmala Konjengbam - 06 December 2020

Salient Features

  • Traditional endowments or unit-linked
  • Available for parents with a minor children
  • Benefits on maturity
  • Benefits paid on death with waiver of unpaid premiums
  • If child dies, death benefit is paid
  • Terms and conditions vary with every insurer; read them carefully

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Aman Tripathi (name changed) lost his father, the sole breadwinner, at an age when he was just about to pursue higher studies. But help was at hand, in the form of a child policy his father had bought 15 years ago from Life Insurance Corporation of India (LIC). It not only paid for his education but also took care of daily expenses. Tripathi is now the managing director of a big private company, and he is still thankful to LIC for financing his education, which eventually made him climb the professional ladder.

There is an important lesson for parents in Tripathi’s story. With admission season for MBA and a host of other higher education courses round the corner, parents could be shelling out anything between Rs 10–Rs 25 lakh for their wards at B-Schools in India. The price-tag could be several notches higher if the children are aiming for foreign studies.

The harsh reality is that costs are likely to double in the next 10 years, given the rate of inflation and depreciating rupee against foreign currencies. If not adequately covered, shelling out the sum could be a real strain on your finances. Alternatively, parents may opt for an education loan. But then, you bear the burden of paying interest, in some cases, till you reach your retirement age.

Parenting is a mix of fun, joy, hard work, and a different genre of responsibilities. Your lives spin around your children and often before you know they are ready to pursue higher education and a career, and then all set for marriage in a few years. The wedding budget could range anywhere between Rs 15 – Rs 25 lakh, if you live in a Tier 1 or Tier 2 city.

In short, you need to start building a corpus at the right time to take care of these expenses.

Various investment options like public provident fund, equity investment, mutual funds, and gold, among others, can help you achieve this goal. However, most of these call for your active investment in managing a portfolio. A child insurance plan often comes handy, is safe and promising, recommends Tripathi based on his experience.

Children’s Plan

A child insurance plan saves you from actively worrying about investing regularly and managing a portfolio. Tax saving is an added advantage. Premiums are eligible for a tax deduction under section 80C of the Income Tax Act, 1961.

You become the policyholder and your child remains the nominee when you purchase the plan. You can get the lump sum amount on maturity of the policy for your ward’s education, wedding, and other expenses. On death of the parent, the benefit is paid, while the remaining premiums are waived off and the plan continues till maturity. If the child doesn’t survive till maturity, a death benefit is paid, and the plan is terminated.

“Child insurance plans secure financial needs…. These help parents build an adequate corpus to meet future expenses without compromising on building a retirement fund,” says Sanjay Tiwari, Director - Strategy at Exide Life Insurance.

Other Benefits

Benefits like flexible premium payment and payout are added advantages. You can pay the premium through annual, semi-annual, or quarterly payment options. The policy can return your investment in a lump sum or in parts at different stages, as and when necessary.
There are two types of child insurance plans:

Traditional Endowment

Like traditional life insurance policies, this plan provides security and helps you build a corpus over a period. The insurer invests your premium in debt instruments for safer returns. On maturity, you get the sum assured along with the bonus you earn.

Unit Linked Insurance Plans (ULIPs)

The insurer invests your premium in the equity market. This offers you an opportunity to generate additional returns over the traditional ones. However, the risk factor of equity-based investment is higher. Select insurers who may allow you to choose the funds you want to invest in.

Perfect Policy

Your choice should depend on the risk factors and future goal, which also means the size of the corpus, purpose, and the time period you have chosen.

“Financial standing, income stability, risk appetite, and financial awareness are key factors determining an appropriate policy. The right service provider should be chosen, based on financial standing and stability, track record, and overall cost of a product as seen
in customised benefit illustration,” says Abhijit Gulanikar, President - Business Strategy, SBI Life Insurance.

Traditional plans are comparatively safer and a continued investment is likely to yield good returns over the long term. You can opt for ULIP when you are scouting for more than average growth over other investment tools. However, it is always advisable to buy unit-linked plans only when the investment period is 10 years or more as equity market generally offers better returns in the long term.

You have another option. Instead of investing in pure equity plans, you can opt for a mix of equity and debt instruments. Some covers also provide the option of switching funds from equity to debt before maturity.

“You set aside a systematic sum every month for a child for 12 to15 years. It will accumulate into a substantial amount, and you can avoid or reduce the need for a large education loan. Setting aside money early also acts as an impetus to manage your own lifestyle for the long-term perspective,” explains Gulanikar.

Inflation Spanner

Inflation rates could make a huge difference when you plan to invest 10 to 15 years ahead. You must consider this while building a corpus. For instance, a four-year course for an engineering degree currently costs Rs 15 lakh; 10 years hence at an annual rate of inflation of 8 per cent, it would cost you Rs 32 lakh.

“Cost of education, domestic and abroad, is increasing with every passing year. In India, the annual education inflation is roughly 7 to 8 per cent. Parents must take inflation into account to make sure they don’t compromise on the quality of education,” Tiwari points out.
Rupee deprecation against dollar or other foreign currencies makes education in foreign universities more expensive. On an average the rupee has been depreciating by a per cent against the dollar every year.

Exclusions

Be cautious as there are exceptions. You need to look into them and bear in mind that most policies will not pay in case of a suicide, drug abuse, and self-inflicted injury. Do not hurt yourself in risky sports and steer clear of criminal activities. The usuals like war, civil commotion, nuclear contamination haven’t been excluded.

These, however, are no reason for not securing your child’s future. It is important you plan your children’s future way in advance and save them from any financial crisis or uncertainty.

nirmala@outlookindia.com

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