There are many good child plans available in the market. Many of these plans will lure you by saying “invest Rs. 5,000 per month for next 20 years and get 1.5 crores or 2 crores after 20 years. Start planning for your child now.” These plans are not wrong by their logic and calculations. But they will cost you more than their worth. Before you take a step to buy a child plan from insurance companies, think about designing your own customized child plan. Keep reading to learn more on it.
What a child plan from insurance companies offer?
If you choose a child plan offered by insurance companies, you will get multiple things wrapped in a single packet. The board features of these child plans are:
- A lump sum amount of sum assured is paid to the child of the investor in case of his death.
- If the investor survived the period, then on maturity of the policy a lump sum amount is paid to the investor. This amount can be used for child’s education or for marriage.
- In case of death of an investor, then a specific percentage of the sum assured is paid to his family till the maturity date of the policy. This way, routine expenses of the family can be met.
Low rate of return offered by child plans
Let us understand with the help of an example:
Sum assured – Rs. 50 lakhs
Maturity period – 20 years
Annual premium – Rs. 2, 06,750
Total premium – Rs. 41, 35,000
If you die, your nominee will get Rs. 50 lakhs and a regular income @10% of sum assured till the maturity date of the policy.
If you survived the maturity period, then you will get Rs. 50 lakhs. Now, look at the rate of return. You will be getting 50 lakhs for a total investment of Rs. 41, 35,000, i.e. a return of merely 2%. You can always add the impact of inflation to it. Therefore, looking at these child plans from returns point of view, these policies are not worth.
What to do? Can I design my own customized child plan?
If you are thinking to design your own child plan as per your requirements and capabilities, then you must be aware of the various financial instruments available in the market. Split the benefits of a typical child plan offered by insurance companies and explore available options for each of these benefits. Let us understand it clearly with the help of an example considering that you want to plan for next 20 years and has a requirement of 50 lakhs.
Step 1: Take up a term insurance policy
With a child plan an investor assures that if he doesn’t survive the maturity period, then his family will get a lump sum amount and a regular income at a specific percentage of sum assured till the maturity date of the policy on annual basis. Take up a term insurance for 60 lakhs which will cost you somewhere around Rs. 15,000 per annum. You can additionally opt for riders. In case of your death, your family will get a sum assured of Rs. 60 lakhs. Strictly instruct your family that in case of your death, they need to invest the entire or part of this amount in fixed deposit. Interest from these deposits will cover for your family’s monthly expenses. The amount of fixed deposit will depend on your total interest requirement.
Step 2: Start investing in monthly investment plan
With a typical child plan, your annual premium amounted to Rs. 2, 06,750. Taking the same level of investment, Rs. 15,000 is invested in term insurance. You can invest Rs. 16,000 on monthly basis in a good investment plan which can be a mix of equity market instrument and PPF. Let us say, that started investing Rs. 10,000 in equity market and Rs. 6,000 in PPF on monthly basis. After 20 years, your total investments in equity would be Rs. 24 lakhs, whereas the market value of your investments would be around 80 lakhs (considering 10% return, which is not difficult to achieve in long run). Your total investment in PPF would amount to Rs. 14,40,000 and at 8% return. After 20 years, you will get Rs. 35, 50,000 approx. from PPF.
Your total investment = 24 lakhs in equity + 14.40 lakhs in PPF = 38.4 lakhs
Amount which you will get after 20 years = 80 lakhs from equity + 35.50 lakhs from PPF = 1.15 crores
Though a customized child plan may seem to be little complex but has an added advantage of flexibility and complete control on where your investments should be made. Moreover, returns from customized plan are far better than the available child plans.