Child Plan – Should you Invest or Not?

Child plan are one of the most popular investment venue for parents to save funds for their children’s future. Every Insurance company has various child plan alternatives to choose from. Here we will be having a look at what exactly is a child plan and whether you should invest in it or not.

What is a Children’s plan?

  • Child plan is an insurance-cum-investment plan, designed to help you save money for your child’s future.
  • Parents or guardians can start investing in this plan right from the time the child is born.
  • In most plans amount accumulated in the plan can be withdraw by the child once he/she reaches adulthood.
  • Many plans also offer option for intermediate withdrawals, at certain intervals for purposes such as higher education, marriage etc.

What’s special about it?

Nothing really, if you look at the simple child plan. It is similar to a term plan, where you invest premium at fixed intervals and at plan maturity you will receive lumpsum money. However since there was nothing special about the simple plan, insurance companies have designed new more targeted plans. These plans do provide some additional features which have been created keeping in mind the requirement of saving for children. Next we will look at the different plan types

Different Types of Children’s Plan:

  • Vanilla / Classic Plan – You invest certain amount in the plan every month/quarter/year, on maturity the amount accumulated will be paid to the child. In case of death of the policy holder the policy will be closed and amount accumulated will be paid to the child.
  • Waiver Plan – You invest certain amount every month/quarter/year, on maturity amount accumulated is paid to the child. However if the unfortunate even of death of the policy holder the death benefit will be paid to the child, and all future policy premiums will be waived off. The insurance company will pay these premiums and the policy will continue until maturity. On maturity the amount accumulated will be paid to the child.

These are the two basic type of children’s plan. Apart from this, most plan also offer option of choosing how you would like to receive the maturity amount. There are two basic variants in this.

  • Lump sum: You can opt to receive the accumulated amount as a lump sum in one go at maturity of the policy.

Or

  • At Intervals: You can choose to receive the maturity amount at regular intervals. E.g. 15% amount 5 years after opening the policy, 15% 10 years after opening it etc…..

All children’s plans are combination of the aforementioned 2 basic variants. So you can have following plan combination:

  • Vanilla plan with maturity amount received lumpsum
  • Vanilla plan with maturity amount received at intervals
  • Waiver plan with maturity amount received lumpsum
  • Waiver plan with maturity amount received at intervals

 

Which plan is right for me?

Vanilla plan with maturity amount received lumpsum

If you have –

  • Made other investments for your child like PPF, Mutual funds etc.
  • Have planned other investment to mature in a manner so as to meet your child’s goal of education, marriage etc.

Vanilla plan with maturity amount received at intervals

If you have –

  • Made other investments for your child like PPF, Mutual fund etc.
  • Maturity of these investments doesn’t time with your child goals. Or the timing is right, but these investments alone won’t be able to support your child’s goals and you will need extra funds which the plan can supply.

Waiver plan with maturity amount received lumpsum

If you have –

  • Done other investment for your child, and these will be able to meet his goals
  • You are the sole breadwinner in your family, and in event of your death, your child’s goals cannot be financed sufficiently

Waiver plan with maturity amount received at intervals

If you have –

  • Not done any other major investments for your child, and this plan is your largest investment
  • You are the sole breadwinner of your house and in the event of your death; your child’s goal might face financial uncertainty.

 

How much money do I need to invest in these plans?

Every plan is different. Some might allow you to invest as less as Rs 1000/- a month, while some others require investment of minimum Rs 10,000/- every month. You can choose a plan that suits your investment budget.

What goals of my child can these plans support?

You can invest in these plans to save funds for your child’s

  • Higher education – This is the most basic expense. You have to save up to help your child study and exploit his full potential. You child might choose to be a Doctor, Engineer, MBA or even a Fashion Designer; everything requires money to study. This is one of the most important goals in your child’s life and saving astutely and sufficiently for it is very important.
  • Marriage – Marriage is a major expense for every parent. When the time for marriage comes, by then inflation and other factors will have made everything much more expensive than today. If you plan to fund your children’s wedding and make it an affair to remember then saving for it is very essential.
  • Business startup funding – Some parents aspire for their child to do business, if you have such aspiration, then save up for it. Your child may or may not choose to do business, but if he/she chooses to do so, its best you save up some funds to help him start off. This saving will help your child immensely in future.
  • Home down payment etc. – You know how difficult and costly it is to buy your own house. Once your child grows up, he too will have to go through the house buying hardship. You can choose to help him/her out by saving up some funds to help with down payment of his/her house. It’s a choice you can make today to lend a helping hand to your child in time of need.

There can be other goals too for which you might want to save up for your child, like funding a car, office, vacation etc.

How do these plans make money?

When you invest money in any plan the insurance company takes that money and invests it in debt or equity market. It might also invest in government bonds, gold etc. This allows the company to earn interest, or appreciation on that money. When your plan matures the insurance company pays you out the maturity amount which is sum of the amount you had invested along with the interest or appreciation it earned on the money you had invested.

You can choose plans based on where they invest, some plans invest exclusively in debt, some others exclusively in equity. Most plans invest in both debt and equity market in some fixed ratio. Some plans also offer you the flexibility to choose how much money you want to invest in debt/equity etc.

Now the most important question. Should you invest in these plans or not?

There is no simple answer to this. The choice to invest in child plan depends on two factors. Let’s look at both of them

  • Can you maintain strict financial Disciple? If your answer is yes then you can skip investing in child plan and choose from more lucrative options like term plan, combined with mutual fund or even invest in equities.
  • Are you the sole breadwinner in your house? If the answer is yes, then in the unfortunate event of your death, the finical goals of your family might get jeopardized. In such a scenario you can look at investing in child plan. However if your spouse is well educated and can understand and handle the financial goals after you then you should consider child plan as your last investment avenue. Your funds can earn much better elsewhere.

What is Financial Discipline?

Investing regularly and on time in your chosen avenue of investment. Example: Paying your EMI and premiums on time everytime.

Not using funds saved for one purpose, for any other purpose. Example: using funds saved for children’s education to finance home loan repayment.

Have question, ask us below.

Read up on other investment avenues to save for your child.

Discover how you can invest in mutual funds to save money for your children’s future.

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