BankBazaar.com CEO Adhil Shetty explains how to choose the best children plan
Child plans available in the market these days appear extremely lucrative,thanks to the wonderfully designed marketing campaigns accompanying them. They are craftily directed to touch your emotional chords and send you rushing to the nearest adviser. Wonderful benefits such as complete financial security,hassle-free investment,regular income and assurance of your child future expenses often lead the less suspecting customers astray and they end up taking a policy that may not yield the best dividends in the long run. On careful scrutiny one would realise that taking the actual benefits into consideration,the investment in child plans would give a return of somewhere between 6% and 8% on the maturity of the plan.
Advantages of creating a customised child plan
Once you have decided to create a customised plan to suit your exact requirements,you will be in better position to enhance your finances through a smart planning. Compared with standard plans available in the market,a customised child plan will provide the following additional benefits:
* There is no direct link between the insurance amount and investment required
* There are no hidden premature withdrawal charges
* You have complete control over the kind of investments you make to get the same insurance cover
* You can change your investment plan as per the prevailing market scenario without having to pay additional switching charges
* With careful investment,one can easily earn up to 15% returns over a standard period of 20 years,which is the maturity period of most commercial child plans However,along with these benefits,it must also be borne in mind that such customised plans imply many hassles of planning and investment for you and exact returns that are accrued will depend entirely on the strength and smartness of your investment plans.
The basic idea behind creating a truly customised child plan is to first break up all the benefits that are provided in standard plans and then create means of achieving the same through other sources as per requirement. Now we shall assume that the plans available have a maturity period of 20 years for a life insured who is 30 years. In a conventional commercial plan,one would have to approximately invest an annual premium of R206,750 (this works out to be around R17,000 per month) for 20 years and would get back a return of R50 lakh in case the Life assured is zero or a return of R100 lakh in case the life assured in R50 Lakh. Now,let us compare it with what a customised plan can do.
1st Step: To get the same or more cover in case of death of the life assured,which a normal child plan provides,you can take a term insurance of R60 lakh,which will come for an annual premium of about R15,000,which leaves R1,90,000 with you to invest elsewhere that would be R16,000 per month. In case something happens to the individual,the lump sum amount can be invested in a fixed deposit to give monthly,quarterly or annual returns to cover the expenses of the childs education and allied activities or even look after monthly expenses. This gives you complete flexibility to decide how much you actually envisage being the need in such an eventuality.
2nd Step: Plan out the investment so that you reach your financial goal of having created at least R50 lakh or more in twenty years which the conventional child plan would have given you. Since the time frame is 20 years,the ideal investment should be equities which will definitely give a handsome return over such a long horizon. Take SIPs of mutual funds for R10,000 a month with a proportionate mix of Large Cap,Mid Cap,Small Cap,Sector & Gold sector to create a diversified portfolio. The remaining R6,000/- (from R16,000 per month saved through 1st step) can be invested in PPF.
Assuming a modest return of 10 % from MFs,you get a net value of R80 lakh from it (at the rate of 15%,it will be R150 lakh which is very much possible) and at 8.6% from PPF,you get an amount of R35.5 Lakh. The sum of the two adds up RRs 1 crore 15 lakh in 20 years,and at the rate of 15% returns on MF,it will be R1 crore 85 lakh. Now compare this with returns you would have got from a conventional child plan from the market)
3rd Step: Since you have made all these calculations separately and independently the 3rd step is of utmost importance in order to be able to reap the true benefits of the scheme. You have to create a document with the details of investments made and the means to retrieve the money so that it can be followed up in case of your sudden demise. Most importantly a clear will must be provided to ease the access to the money when the situation demands.
A customised child plan despite the hassles it entails is certainly a smart move to have adequate cover while creating substantial wealth over a long period of time.