In Part 1, we covered WHAT should be the expenses that you need to plan for. To summarize, College, Post-Graduation and Marriage expenses should be planned for. Other expenses can be managed from regular income.
Further, in Part 2, you read WHERE to invest your money and WHY that is indeed the best way – Equity, PPF, FD or similar instruments (in that order) could be a preference, provided you have time on your hands. You also understood the significance of having a Term Insurance plan to protect your child’s future from any unforeseen eventualities.
In this concluding part, let us see how the investments should be made and how much.
Part 3. Where to Invest when creating a Child Plan, and how much?
In the next few minutes, you should be clear about how a complete child plan can be made for your own child/children. And to do that, follow these steps.
First, start with the age of your child. We will use an illustration to simplify this. Say, you have a daughter who is 7 years old (if you have a younger child, even better since you get much more time). It is good that you are starting early, so you have 27-7=20 years for her marriage, 22-7=15 years for her post-graduation, and 18-7=11 years for her college expenses to kick off. That’s a great situation to be in.
Next, let us plan an amount. While there are several ways to do it, we will use a thumb rule here which is specific to India. i.e. Cost of the same for the parent, multiplied by 15. Your college expenses were probably about Rs. 1 lakh, Post-Graduation expenses were about Rs. 3 lakhs, and Marriage expenses were about Rs. 5 lakhs. So it will cost your daughter Rs. 15 lakhs, Rs. 45 lakhs and Rs. 75 lakhs respectively. (Don’t add them up, you need them at different times). Now these costs are for the kind of degree and education that you got. If your daughter makes it to an international university of repute, the cost of education (but not marriage) could (at least) double.
So we now have a revised plan.
- Rs. 30 lakhs for College after 11 years,
- Rs. 90 lakhs for Post-Graduation after 15 years,
- and Rs. 75 lakhs for Marriage after 20 years.
It is getting clearer now. But the amounts are staggeringly high, aren’t they? Don’t worry, there is a solution. And the power of compounding helps us achieve these goals.
Next, understand where to invest the money and what kind of return can be expected.
Going by the above infographic…
- College Fund (11 years) – 75% in Equity, 25% in a Fixed Deposit – expected tax-free returns will be 10%
- Post-Graduation Fund (15 years) – 90% in Equity, 10% in PPF – expected tax-free returns will be 11%
- Marriage Fund (20 years) – 90% in Equity, 10% in PPF – expected tax-free returns will be 11%
- A term plan will be required to cover up for these 3 expenses just in case you were to die midway into the plan.
We now need to work backwards to find out how much money is required to be invested if done regularly every year.
- College Fund – Rs. 1,05,241 per year to be invested every year for 20 years
- Post-Graduation Fund – Rs. 2,35,664 per year to be invested every year for 15 years
- Marriage Fund – Rs. 1,47,172 per year to be invested every year for 11 years
- A term plan will be required for a total life insurance cover of Rs. 1.90 crores for 20 years, that will cost you roughly Rs. 20,000 per annum.
It’s clear now. You have to invest about Rs. 5 lakhs per annum to ensure that all plans for my child are met. If you have another child, this amount could be higher depending on how old he/she is.
You can now proceed to do this calculation for your own child/children. If you find the amount that you need to invest too high, you can even opt to start with a lower contribution now and increase it every year by say 10% (in accordance with increase in your annual income).
You may even choose to buy a child plan from an insurance company which gives you a combination of life insurance and tax-free returns and is safe and guaranteed. Go ahead but ensure that the gap in insurance is made up by a term insurance plan, and the gap in returns is made up using equity instruments such as ULIPs/Mutual Funds, or through PPF/FD/RD. Remember the objective yet again – to beat inflation.
A few closing remarks.
Discipline is the key. If you want to achieve the goal, ensure you invest regularly. Once a month (from your salary) through an ECS (electronic clearing system from your bank account) is the most recommended mode since it deducts the money automatically for this important cause. An insurance plan works well here since it needs regular investment of premium to keep the policy in force, and forces you to stay invested.
Liquidity in your investments is NOT desirable. This is so that you don’t withdraw from the fund for something else. You don’t want to compromise on your goals, right? An insurance plan works best here as well since it has high surrender penalties.
We pray this works for your child/children.
What a wonderful advice… please write more on Child Insurance policies.
Thanks for your comments, Jasmin.
Thanks for your comments, Jasmin.
very useful information.. to be honest no one gives this type of illustration .. congrates to yr team for hard numerical work which is very difficult.
i am father of twins one boy and girl.. will find yr help as i become a bit clear regarding pension plan , ins plan and child plan and my income status..will need help to go with which mf or ulip..
thanx see u soon.
very useful information.. to be honest no one gives this type of illustration .. congrates to yr team for hard numerical work which is very difficult.
i am father of twins one boy and girl.. will find yr help as i become a bit clear regarding pension plan , ins plan and child plan and my income status..will need help to go with which mf or ulip..
thanx see u soon.
Mintwise team,
Thank you for the very prompt reply and advice.
You are doing a fabulous job on this website; the information is very helpful, keep it up!!!
Mintwise team,
Thank you for the very prompt reply and advice.
You are doing a fabulous job on this website; the information is very helpful, keep it up!!!
Sowmya, we are glad you asked these questions. These are a dilemma for most DISK (double income single kid) families.
(1) On saving for your child, we are thrilled that you are thinking about it at a stage when your child is a new born. It gives you a lot of time to plan and invest, and most importantly enough time to create the fund that your child will need. We urge other parents reading this to emulate Sowmya’s and her husband’s approach on the timing of starting to plan for their child’s future needs.
(2) Sowmya, on the question of “insuring the entire amount through term insurance”, well, term insurance is not a savings tool. It is a pure protection product. Your nominee gets the insurance cover if you (that is, the insured person) were to die. So Term Insurance comes into play only if something goes wrong, not otherwise.
Endowment insurance products give poor returns and cannot beat inflation. For creating the fund for your child’s future, you need a set of products that even out risks as well as beat inflation net of taxes. You have to look at combination of financial products such as PPF, FDs, RDs, ULIPs and (what we always recommend) Equity through Mutual Funds.
(3) Finally, while we have limited information about your family, incomes, expenses, etc. it appears that Rs. 10 lakhs of insurance cover between the two of you, is really very very low. Both of you are likely to need much higher term insurance. Please refer to the link below to calculate the requirement. Remember to add outstanding loans to make it more accurate.
When calculating, try to split all liabilities and incomes exactly as it is for both individuals. So if there is a home loan in the father’s name alone, add that only to his term insurance cover. If the mother’s income is higher, ensure that you put it exactly that way when you calculate her term insurance need. DON’T TAKE AVERAGES. Expenses could be divided in the ratio of the incomes.
https://www.mintwise.com/blog/calculate-life-insurance-coverage/
Hope this is clear. Let us know if you need any more detailed views.
Sowmya, we are glad you asked these questions. These are a dilemma for most DISK (double income single kid) families.
(1) On saving for your child, we are thrilled that you are thinking about it at the stage that your child is a new born. It gives you a lot of time to plan and invest, and most importantly time to create the funds that your child will need. We urge other parents reading this to emulate Sowmya’s and her husband’s approach on the timing of starting to plan for their child’s future needs.
(2) Sowmya, on the question of “insuring the entire amount through term insurance”, well, term insurance is not a savings tool. It is a pure protection product. Your nominee gets the insurance cover if you (that is, the insured person) were to die. So Term Insurance comes into play only if something goes wrong, not otherwise.
Endowment insurance products give poor returns and cannot beat inflation. For creating the fund for your child’s future, you need a set of products that even out risks as well as beat inflation net of taxes. You have to look at combination of financial products such as PPF, FDs, RDs, ULIPs and (what we always recommend) Equity through Mutual Funds.
(3) Finally, while we have limited information about your family, incomes, expenses, etc. it appears that Rs. 10 lakhs of insurance cover between the two of you, is really very very low. Both of you are likely to need much higher term insurance. Please refer to the link below to calculate the requirement. Remember to add outstanding loans to make it more accurate.
When calculating, try to split all liabilities and incomes exactly as it is for both individuals. So if there is a home loan in the father’s name alone, add that only to his term insurance cover. If the mother’s income is higher, ensure that you put it exactly that way when you calculate her term insurance need. DON’T TAKE AVERAGES. Expenses could be divided in the ratio of the incomes.
https://www.mintwise.com/blog/calculate-life-insurance-coverage/
Hope this is clear. Let us know if you need any more detailed views.
Hi,
We are a double income couple with a new born child. We have a sum assured of 10 lakhs between us through endowment insurance plans. We are planning to invest for your child’s future expenses. Since we are both earning, do you think that we should still insure the entire amount that we would like to save for our child through term insurance?
Also, for term insurance for both of us, we are planning to split all expenses/liabilities and investments in half and take a term insurance cover accordingly. Is that the right approach?
Hi,
We are a double income couple with a new born child. We have a sum assured of 10 lakhs between us through endowment insurance plans. We are planning to invest for your child’s future expenses. Since we are both earning, do you think that we should still insure the entire amount that we would like to save for our child through term insurance?
Also, for term insurance for both of us, we are planning to split all expenses/liabilities and investments in half and take a term insurance cover accordingly. Is that the right approach?
Mintwise, I really appreciate the quick response by you to answer my queries.
This will certainly help me in choosing the right one and as u rightly said ,I will try to diversify the funds available with me.
thnks again
And big thanks to you as you are doing a gr8 job here by educating the peoples about life insurance.
Mintwise, I really appreciate the quick response by you to answer my queries.
This will certainly help me in choosing the right one and as u rightly said ,I will try to diversify the funds available with me.
thnks again
And big thanks to you as you are doing a gr8 job here by educating the peoples about life insurance.
Sachin, we are extremely happy to hear that you realized the need for a term plan, bought it and even advised others to buy it. That’s a great service you have done to your and your friends’ families.
On your query on ULIP for Child Plans, yes, ULIP is indeed an option if you are taking it for at least 15 years. Otherwise initial charges are just too high to recover, even after the recent structural change, when you compare it to Mutual Funds. Whether it is BSLI or any other is entirely a matter of choice, we wouldn’t want to influence that. Do note that most ULIPs do not put all the money in equity hence returns are limited even in fully equity-linked funds.
Having said that, if you already have a term plan and if the cover is adequate, you don’t need protection, you only need good returns. That’s where Mutual Funds come in as an option since they deliver high returns since they are able to put all the money in equity. So do consider them as an option as well. Additionally, you can choose multiple fund houses in MFs and even move from one to the other if they are under-performing, without much penalties. In a ULIP, your are locked to the specific company’s funds only.
Note: whatever you finally take, stay away from 2 things – trying to time and switch funds, and taking money out for some other purpose. Unfortunately, both ULIP and MF offer these two flexibilities.
So, our advice is – diversify. Don’t put all your eggs in one basket. You get only ONE chance in your lifetime to plan your child’s future and you CAN’T afford to get it wrong!
On the matter of adequacy of your life cover, do use the calculator in the article linked below to calculate your requirements.
https://www.mintwise.com/blog/calculate-life-insurance-coverage/
Sorry for a longish answer, but we hope this helps you, Sachin.
Sachin, we are extremely happy to hear that you realized the need for a term plan, bought it and even advised others to buy it. That’s a great service you have done to your and your friends’ families.
On your query on ULIP for Child Plans, yes, ULIP is indeed an option if you are taking it at least for 15 years. Otherwise initial charges are just too high to recover, even after the recent structural change. Whether it is BSLI or any other is entirely a matter of choice, we wouldn’t want to influence that. Do note that most ULIPs do not put all the money in equity hence returns are limited even in fully equity-linked funds.
Having said that, if you already have a term plan and if the cover is adequate, you don’t need protection, you only need good returns. That’s where Mutual Funds come in as an option since they deliver high returns since they are able to put all the money in equity. Do consider these as an option as well. Additionally, you can choose multiple fund houses in a ULIP and even move from one to the other if they are under-performing, without much penalties. In a ULIP, your are locked to the specific company’s funds only.
Note: whatever you finally take, stay away from 2 things – trying to time and switch funds, and taking money out for some other purpose. Unfortunately, both ULIP and MF offer that option.
So, our advice is – diversify. Don’t put all your eggs in one
basket. You get only ONE in your lifetime to plan your child’s future
and you CAN’T afford to get it wrong!
On the matter of adequacy of your life cover, do use the calculator in the article linked below to calculate your requirements.
https://www.mintwise.com/blog/calculate-life-insurance-coverage/
Sorry for a longish answer, but we hope this helps you, Sachin.
Hey Mintwise,
I am 32 yrs old and a regular reader of all your articles .
After reading about the term Insurance, i took it immediately.Thanks for that article.That was a real eyeopner for me and I explained this to couple of my friends and forced them to took it.
I need a quick suggestion from you related to child Plans.
I recently blessed with a baby boy and I am planning to buy a BSLI wealth secure ULIP for all his future requirments as you mentioned.
Will it be a good option ? or can you suggest me any other good options.
I have a Term insurance cover of 1cr? will it be suffice?
Hey Mintwise,
I am 32 yrs old and a regular reader of all your articles .
After reading about the term Insurance, i took it immediately.Thanks for that article.That was a real eyeopner for me and I explained this to couple of my friends and forced them to took it.
I need a quick suggestion from you related to child Plans.
I recently blessed with a baby boy and I am planning to buy a BSLI wealth secure ULIP for all his future requirments as you mentioned.
Will it be a good option ? or can you suggest me any other good options.
I have a Term insurance cover of 1cr? will it be suffice?
Amey, thanks for your kind words and the feedback.
What we have done is doubled the post-graduation expenses assuming that the child makes it to a foreign university, and that’s the reason it is taken as Rs. 90 lakhs instead of Rs. 45 lakhs. This assumption is mentioned in the article.
Nevertheless, really appreciate the effort you took to respond. Big thanks once again.
Amey, thanks for your kind words and the feedback. Well, we have doubled the post-graduation expenses assuming that the child makes it to a foreign university, that’s the reason it is taken as Rs. 90 lakhs instead of Rs. 45 lakhs. This assumption is mentioned in the article.
Nevertheless, really appreciate the effort you took to respond. A big thanks once again.
Hey I am a fan of your articles, very well thought out and written. By the way, there is a calculation mistake in this article for the PG expenses which you have mistakenly taken as 90 lacs instead of 45 which is impacting the final calculations in a big way!
Hey I am a fan of your articles, very well thought out and written. By the way, there is a calculation mistake in this article for the PG expenses which you have mistakenly taken as 90 lacs instead of 45 which is impacting the final calculations in a big way!
All 3 parts every parents must be readi.ng. Good advise
All 3 parts every parents must be readi.ng. Good advise
Sure we will. Shortly. Thanks.
Sure we will. Shortly. Thanks.
Excellent article. Can you please help us with a calculator?
Excellent article. Can you please help us with a calculator?
Jagadeesh, thanks.
For you elder child, you will need money from age 18 to 24, so you have 10-16 years, which is really good. I would recomment either a ULIP or MF for a period of 14-16 years (see the equity share from the article above) which can give you good returns (ULIP will be tax-free as well) + a long term FD/RD/Traditional Child Insurance for 10-12 years which will give you both discipline and stability. good luck.
Jagadeesh, thanks.
For you elder child, you will need money from age 18 to 24, so you have 10-16 years, which is really good. I would recomment either a ULIP or MF for a period of 14-16 years (see the equity share from the article above) which can give you good returns (ULIP will be tax-free as well) + a long term FD/RD/Traditional Child Insurance for 10-12 years which will give you both discipline and stability. good luck.
Read all your 3 parts – it is very very informative and knowledgeable.
I have 2 children – 8 years and 2 years old. For my younger one, since there is time available, I will be able to plan properly. i am worried about my elder one – since he is already 8, i have only 10-12 years after which lot of money may be required. please advise what to do in that case.
Read all your 3 parts – it is very very informative and knowledgeable.
I have 2 children – 8 years and 2 years old. For my younger one, since there is time available, I will be able to plan properly. i am worried about my elder one – since he is already 8, i have only 10-12 years after which lot of money may be required. please advise what to do in that case.