Of late you will see and hear ads of a lot of companies (life insurance companies, mutual funds, sometimes even banks and NBFCs, financial advisory companies, etc.) yelling on top of their voice about planning a fund for your child. The cause they are promoting is definitely good. But remember that all such plans are not the same. Specifically, an education insurance plan is very different from all others.
You may need a combination of multiple plans to have a solid foundation for your child. I am covering that separately. This write-up is more to do with Education Insurance plan, or Child Plan as it is commonly called which are sold by life insurance companies. Know this product well and how it can fit well into your child education funding goals, before you decide to buy it.
First, understand this! Don’t get fooled!
Let me first resolve a basic confusion that some life insurance agents have been taking advantage of.
An insurance plan taken on the life of a child (where the beneficiary on death of the child is the parent) is NOT a child plan. Some agents sell this to (even well-educated) customers as a child education plan, but such a plan is very far from it. Such a plan is just an investment plan. Where is the question of buying insurance with your child as insured? And what is the need for an education plan if something happens to the child? Please understand this first.
A real child plan (or education insurance plan) is an insurance plan that ensures that the child is financially protected if the parent dies. Remember that this is an Insurance plan and therefore different from all others which only help you to build a fund for your child over time. The insurance plan does both fund creation as well as protection.
Who can take a Child Plan?
One (or both) of the parents can take a child plan by taking an insurance on their (i.e. parent’s) life. If the parent dies, in addition to the life insurance paid out immediately to child (or an appointee if the child is a minor at the time of death of the parent), a certain the premium gets contributed into the policy by the insurance company and an additional amount (usually guaranteed) is paid out during the key milestone years such as when the child is in Std. X, XII, or at Graduation and/or Post Graduation, marriage, etc. This ensures that the child does not suffer financially because of the death of the parent. Some plans also provide for an annual income so that the child’s education is fortified with extra inputs such as extra-curricular activities, hobby classes, sports and fitness, besides regular school/college fees.
Child plans are regular premium plans, wherein premium is paid for limited period or throughout the term of the policy.
How are Child plans different from other investments you do for your child?
Cost of education is growing much higher than inflation rate of 5-6%. In fact, think about it yourself. School and College fees today would be at least 15-20 times higher for you, the parent, than what it is today. And fees for professional courses such as MBA, MBBS, Engineering, are already so high even today. Can you imagine how much it will go up by in the next 18-25 years when your child will need it?
Assocham in a recent survey called “Steep Rise in Education Fees” highlighted that school expenses, including tuition fees, have doubled to Rs 1.20 lakh per annum from 2005 to 2011 on a single child. The school-related expenses include uniforms, books, stationery, sports activities, contributions to schools funds, school trips, transport, school aids, tuition, and of course, extra-curricular activities that are needed for all-round development. The survey goes on to mention that about 85% of parents spend more than half of their net income on expenses related to their children’s education and development, placing significant pressure on their overall family budget.
And education expenses are inflating @ nearly 15-18%% every year. An MBA degree in 2030 will cost you Rs. 60 lakhs and an MBBS degree around Rs. 2 crores!
There is only one way you can ensure that your child (or children as the case may be) get the necessary educational support, and that is by planning for this expense. Most of would have planned something or the other – some of us may have put savings into a Recurring Deposit (RD), some into a Mutual Fund (MF), and some of us in an Fixed Deposit (FD). The fact is that to reach the amount of money required 15-20 years from today, you need to regularly keep investing money to build the fund over time. With a good rate of return, and some good planning from your side, you will surely be able to make it to your goal. I really hope you do.
The question is – what is the guarantee that you are there all the while to keep putting those regular savings into the education fund you want to create??? What if you die half way?
That is where an education insurance plan (or child plan) comes in. It ensures that even if you were to die, regular amounts of money is passed on to your family to support your child’s dreams and aspirations. It also provides for marriage costs, and other expenses. And the double benefits of tax make it an even better proposition.
It is therefore a good idea to buy a child plan (in addition to everything else that you are doing for you child) especially if you do not have a term insurance plan.
Remember that the best way to guarantee that your child’s goals are met come what may, is have an education insurance plan (and/or a term insurance plan) + other higher return options (such as MF, Equity, etc.) which will help you balance your overall portfolio between risk, return and life protection.
But either a child plan or a term plan is a MUST!