Are you one of those parents who are uncertain about what is the best way to save for your child’s higher education or marriage? While you are aware about the various investment options available, you don’t really understand the risk and return proposition that these products offer. You have been told that child insurance plans are a good investment for long-term, but alternative investments like mutual funds has far better returns than the former. 

 

Let’s look at what child insurance plans have to offer vis-à-vis alternative investments like mutual funds, PPF and understand the pros and cons of choosing either of them.

 

What Are Child Plans?

 

Child insurance plans are basically insurance-cum-investment products whose objectives are to secure your child’s future, even when you are no longer around.There are many benefits associated with such plans. Firstly, child plans provide a cover on death, help you save and plan for children’s future expenses for education and marriage. Secondly, unlike other insurance plans, these plans do not lapse on the death of the parent.

 

Here, the sum assured is paid to the child in the event of the death or disability of the parent before the term expires. Typically in such cases, the premiums for the rest of the term are borne by the insurance company, this is called the “Waiver of Premium.” On the maturity of the policy, the maturity value is paid to the child. Therefore, the payout happens twice — after the death of the parent, and at the time of plan maturity.

 

For starters, child plans can either be traditional plans or they can be market-linked plans, also known as child unit-linked insurance plans (ULIPs). Traditional or endowment plans, which only invest in debts, are usually more apt for conservative policyholders. You can choose any of the two options and can even switch between the two options,when your risk appetite changes.

 

Are child plans worth it?

 

This is the dilemma most parents face. Are they really worth it? Given that there is an alternate path tosecure your child’s future financial needs. i.e. you can separate investment and insurance by investing in mutual funds or PPF and buying a term policy. Term policies are high coverage-low premium insurance covers that protect you for a specific tenure. Here in case of death, your beneficiary will receive the sum assured to cover the loss of income in your absence.The investment can be taken care through investment in a mutual fund or PPF.

 

The expected cost of your child’s education and/or marriage would be your target fund value. To achieve that target fund value, you can, create your own portfolio by investing in Systematic Investment Plans (SIPs) of equity mutual funds an advantage of this approach is that you can easily change the fund, incase any particular equity fund does not perform.  

 

You can also opt for a regular Equity Linked Saving Schemes (ELSS)by paying yearly premium. A more conservative risk-averse investor can invest in PPF instead of equity funds. However, the returns from PPF are often low when adjusted with inflation. Investing in debt mutual funds can be a better option, if capital preservation is your prime objective. If you have a moderate risk appetite, you can opt for balanced mutual funds.

 

The approach has its own merits, but there is also a possibility that in the event of death of a parent, the sum assured paid to the beneficiaries might be spent on other things instead of the intended purpose. 

 

Where does child insurance plans score over “term plus mutual fund” approach?

 

Table: How child plans fare against the combo of term and mutual fund

 

Let’s take an example to show a comparison. Say, a man starts investing for his 3-year-old child at the age of 30 for a 15-year term.

 

Parameters

Child Plan

Term Plan + Mutual Fund (SIP)

Tenure

15 years

15 years

Annual Premium

Rs 1,00,000

Rs 1,835 (Term investment) + Rs 96,000 (Total SIP investment in a year)

Total investment during the tenure

Rs 15,00,000

Rs 14,67,525

Sum Assured

Rs 10,00,000

Rs 10,00,000

Mortality Charges

Rs 63,085

Rs27,525

Maturity Value

Rs 24,74,628

(assuming 8% returns*)

Rs27,68,305

(assuming 8% returns*)

Total investment in 5yrs

Rs 5,00,000

Rs 4,89,175

Total Benefit (if you die after 5 years of initiating the policy)

Rs 15,62,394

Rs 15,87,815

 

*For fair comparison, we have calculated returns for both products at similar rate

 

As evident from the table, the term plan + Mutual Fund (SIP) combo does offer higher returns at the end of investment tenure, if we assume that both provide conservative returns of 8% per annum. If you look at child plans, they come with various added advantages such as Waiver of Premium and riders such as accidental benefits and family income benefit.

 

While accidental benefits can take care of your child’s needs in case of loss of family income due to your disability, family income benefit would help secure your child’s interest in case of your death.These sort of riders are absent in mutual funds as their focus is on higher returns.

 

If you are a savvy investor with do-it-yourself investment approach, you can opt for a “term insurance plus mutual fund” approach. Child insurance plans, on the other hand, offer complete financial solution for an individual with hands-off approach.

 

 

 Yashish Daiya is the CEO of Policybazaar.com.

 The views expressed here are his own