Becoming a parent may be one of the most glorious feelings in the world, but it doesn't last forever. It's an adventure that needs to be well planned. With tuition fees shooting through the roof, raising a child is not as basic as it used to be. Add to that the aspiration for your child to be the perfect all-rounder-the tennis, music and karate classes-and the costs are likely to burn a fairly large hole in your pocket.
This is where insurance plays a significant role as not only does the market understand these needs, if done the right way, it also ensures you optimize your wealth, secure your child's future and sail through a major part of your parental responsibilities.
As per my knowledge goes around 30% to 40% of the people surveyed wanted to invest in their children. That is because people who traditionally invest in safer options such as fixed deposits and gold tend to ignore the fact that these investments don't come with tax benefits and seldom survive inflation.
It is also found that more than half the people who wanted to invest for their children opted for higher education plans. It is not surprising as, the costs of higher education have risen phenomenally in the past few years.
From IITs and IIMs to private colleges offering diplomas in professional courses and overseas universities, education is no longer affordable. Studies say that the investment in children's plans has grown at twice the speed in the past few years.
While there are many plans such as marriage endowment that parents can choose from, the most sensible and relevant are education based plans. These plans usually offer a money-back policy and include both, the investment and insurance aspects. There are broadly two types of investment plans that parents can opt for.
Unit linked insurance plans
A unit linked insurance plan (ULIP) gives you the option of investing across various schemes such as diversified equity funds, balanced funds and debt funds. The returns in a ULIP depend upon the performance of the fund in the capital market. It is usually the investor who bears the risk in such plans. While investing in a ULIP is a good option, it is not always cheap.
One needs to understand the costs that are involved. Even the amount of money invested is higher than that of a traditional plan. The approximate costs of a children's ULIP is between Rs 20,000 and 30,000 a year. The advantage of investing in ULIPs is that they are regulated by the government. But they are only advisable for people who have a higher propensity to take risks.
ULIPs have certain limitations of how much you can withdraw at what time. The problem parents often face while investing in such plans is that they are unable to predict what their child's future holds. To overcome this challenge, the best way is to take the middle road. Don't keep a conventional three or a five year course in mind. Plan for a course that will last for four years. The maturity benefits will then take care of the goals that you have set for your children. They might even cover costs of post graduation.
Traditional plans
Traditional children's plans, unlike ULIPs, offer money back and endowment policies, which are a safer bet. They are also more basic in nature as they often work as an alternative for bank deposits. But the returns of such policies are relatively low and they do not cover inflation costs as well as ULIPs do.
Traditional plans are best for parents who are not too financially savvy. The risk is far lower as there is no direct investment in the market. There are added advantages to traditional plans as insurance companies also give you the option of bearing the cost of the plan till the date of maturity in case the parent paying the premium dies.
However for parents who don't mind spending their time understanding the pros and cons of all available options, and have the money to spend, the best investment for their children is to build a security basket with investments in different plans such as equities, mutual funds, fixed deposits as well as a ULIP or a traditional plan.
A varied portfolio of this nature comes in handy at a later stage. Like most other investments, children's plans also give you best returns if you start investing early. To me the ideal age to start is by the child's fifth year. Leaving it for later will raise the cost of investment significantly.
Late investment increases costs as the gap between the child's age and college decreases. So you're essentially losing time.
Start planning your child's future and let the joys of parenting take over the stress.
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