Life insurance providers launch children’s plans all through the year, with variations. Max New York’s College Plan, for instance, is for investing for your child’s higher studies. These can be traditional or unit-linked policies meant for long-term planning for your children. And, this may be tempting because you want the best for your child.
Unit-linked child plans have two types. One, covers the child’s life only after he is seven. The advantage: The earlier you start, the lower the risk and the higher the investment tenure. The second one covers the policy proposer or the parents. If the parent (policyholder) passes away, the insurer pays the premium so that the child receives the targeted corpus on maturity. The premiums for the former can be very high as mortality rates are higher for children aged 7 to 14 and dip after that till age 20.
Traditional plans offer fixed returns, either at maturity or in small amounts at fixed intervals (money-back plans) may be conservative or aggressive, depending on their equity exposure. Unit-linked plans have a higher exposure to equities. Conventional plans do not invest in equities.
The deterrent, in case of a unit-linked plan, is its front-loaded structure. Though the insurance regulator has tried to solve this problem, the new structure is an expensive option compared to other avenues of saving for your children. The policy allocation charge eats into your premium before it is invested and is applicable for most part of the policy term. This ranges between 5-7 per cent in the first year and is lowered to 2-3 per cent for the subsequent years. Then comes the policy administration charge, a fixed (typically, Rs 40-50) or variable (as a percentage of the premium) monthly cost, varying with insurers. And lastly, the fund management cost of 1.25-1.35 per cent, annually. In fact, the cost of any feature given by these plans is built in the premium. For instance, the cost of premium waiver benefit is built into the mortality rate mostly.
A better, low-cost option is investing through mutual funds. These charge a fixed expense ratio annually. For example, an equity-diversified fund charges 2.25 per cent a year. On average, equity funds return 12-15 per cent annually, which could help create a significant corpus over a long term or 10-15 years.
Some may argue the structure of Ulips disciplines an investor, as it asks for annual payment of the premium and there is a five-year lock-in. But, mutual funds are easy on your pocket due to the low-cost structure and investing through the systematic route will ensure discipline.
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Investment through fixed deposits is also a good option, in case you are risk averse.Banks offer as high as 10 per cent interest on a one-year term deposit at present.
Insuring your child doesn’t make sense because the child does not have any dependants. If you still insist, you could take a low-cost term plan that covers the child in case of the parent’s death.