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Should I invest in a child insurance plan for my children's education?

Moneywize

Moneywize   |174 Answers  |Ask -

Financial Planner - Answered on Sep 27, 2024

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Asked by Anonymous - Sep 26, 2024Hindi
Money

I am 40 lives in Madurai with two children aged 12 and 9. I have a term insurance plan, but I’m wondering if I should invest in a child insurance plan for my kids' future education. Is it worth considering, or should I stick with mutual funds?

Ans: When planning for your children’s future, especially their education, it’s natural to consider different investment options that provide financial security. You mentioned that you already have a term insurance plan, which is an excellent foundation for life coverage. Now, you're contemplating whether to invest in a child insurance plan or stick with mutual funds for your children’s education.
Both options come with their advantages and considerations, but they serve different purposes and operate on different financial principles.

1. Understanding Child Insurance Plans
Child insurance plans are a combination of insurance and investment. They are designed to secure your child's future in case of your untimely demise while also offering a financial corpus for education or other major milestones. Here’s a breakdown of their key features:

• Life Coverage: In the event of the parent’s death, the insurance component of the child plan ensures that a lump sum is paid to the child or the nominee. Some plans also waive off future premiums, ensuring the plan continues and the investment portion keeps growing.
• Maturity Benefits: Child insurance plans provide maturity benefits, where a lump sum amount is paid when the policy matures. This is typically aligned with the child reaching adulthood, making it a useful fund for higher education or marriage.
• Premium Payments: Most child plans require regular premium payments, which can be annual, semi-annual, or monthly. Some plans allow partial withdrawals for education or emergencies without breaking the plan.
• Risk Management: Since these are primarily insurance products, they have a lower risk factor than equity mutual funds. However, this also means that the returns may not be as high as those generated by more market-driven instruments like equity funds.

2. Pros and Cons of Child Insurance Plans

Pros:

• Financial Security: The primary advantage of child insurance plans is the built-in life coverage. In the unfortunate event of the parent’s demise, the child’s education and future are safeguarded.
• Guaranteed Payout: Child insurance plans offer guaranteed payouts either at maturity or as a death benefit, providing a predictable source of funds for education.
• Premium Waiver: Many plans come with a premium waiver in case of death, ensuring that the policy continues even if the parent is no longer around to make payments.
• Tax Benefits: Premiums paid toward child plans qualify for tax deductions under Section 80C of the Income Tax Act, and the maturity benefits are tax-free under Section 10(10D).

Cons:

• Lower Returns: Compared to mutual funds, child insurance plans often deliver lower returns as a significant portion of your premium goes toward the insurance cover rather than investments.
• Lock-In Period: Child insurance plans come with a long lock-in period, which reduces flexibility. In case of any urgent requirement, it may not be easy to access funds as you can with other investments.
• Higher Costs: The combination of insurance and investment usually means higher premium costs compared to what you might pay for a standalone term plan plus an investment in mutual funds.

3. Mutual Funds for Child’s Education

Mutual funds, particularly equity mutual funds, are market-linked instruments that offer the potential for higher returns, especially over the long term. Here’s why they are often recommended for funding long-term goals like a child’s education:
• Flexibility: Mutual funds offer a wide range of investment options based on your risk appetite. You can choose from equity, debt, or hybrid funds depending on your financial goals and timeline. For long-term goals like education, equity mutual funds or balanced funds tend to perform well, offering the potential for inflation-beating returns.
• Higher Returns: Historically, equity mutual funds have provided better returns than traditional insurance-linked plans or debt instruments. Over a period of 10-15 years, a well-chosen equity fund can deliver double-digit returns, helping you build a substantial corpus.
• Systematic Investment: With mutual funds, you can invest through Systematic Investment Plans (SIPs), which allow you to contribute a fixed amount monthly. This helps in rupee cost averaging and reduces the impact of market volatility.
• Liquidity: Mutual funds, especially open-ended funds, offer greater liquidity than child insurance plans. You can redeem your investments anytime without hefty penalties, making it easier to access funds when needed.
• Goal-Oriented Approach: You can tailor your mutual fund investments according to your specific goals. For example, you could allocate a portion of your portfolio to large-cap equity funds for stability and another portion to mid-cap or small-cap funds for higher growth potential.
• Tax Efficiency: Equity mutual funds held for more than a year qualify for long-term capital gains (LTCG) tax, which is currently 10% on gains above Rs 1 lakh, making them tax-efficient for long-term wealth creation.

4. Why Mutual Funds Might Be Better for You

Given your situation -- a 40-year-old with two children aged 12 and 9 — mutual funds could be a better fit for several reasons:

• Time Horizon: You likely have around 5-10 years until your children begin their higher education. Mutual funds, particularly equity funds, have the potential to deliver higher returns over this period compared to child insurance plans. This is crucial, as education costs tend to rise with inflation, and you’ll need an investment vehicle that can keep up with or exceed this rate.
• Flexibility: Mutual funds allow you to adjust your portfolio over time. For example, you can start with equity funds while you’re further away from your goal and gradually shift to safer debt funds as your children approach the age when the funds will be needed. This flexibility is hard to find with insurance-linked plans, which tend to be more rigid.
• Lower Costs: By opting for mutual funds, especially direct plans, you can avoid the high costs and commissions typically associated with insurance products. This allows more of your money to work for you in the market.
• Goal Alignment: Mutual funds can be more aligned with the specific goal of education planning. You can even consider investing in child-specific mutual funds, though these operate similarly to regular equity or hybrid funds, with an added emphasis on the goal of education.

5. Conclusion: Stick with Mutual Funds

While child insurance plans offer the benefit of life coverage and guaranteed payouts, they may not be the most efficient way to fund your children’s education due to their lower returns and higher costs. Since you already have a term insurance plan, which covers the life insurance aspect, mutual funds seem like a better fit for building a substantial education fund. Their potential for higher returns, flexibility, and tax efficiency make them more suitable for long-term goals like your children’s higher education. By carefully selecting a mix of equity and hybrid funds, you can likely achieve your financial goals while maintaining the flexibility to adjust your investments as needed.
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Ramalingam

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Asked by Anonymous - Jun 26, 2024Hindi
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We have invested 3k from last 4 years in Aditya Birla mutual fund equity based. And last year kotak mid cap and small cap of 7k and 3k respectively. Other than this we invest in NPS 50k per year from last 5 years and have two lic policies of 5 lalk sum assured. We have two kids aged 7 and 4. Earning is 1 lakh . Expenses are home loan 31k for 32 lakh loan of 15 years , 3 years are done. Monthly expenses are 31k emi, 30k home, 15 k parents. Please suggest if this is a good way to invest for future of our children or any changes that need to be done we plan to keep investing in mutual funds for long term. Kotak Balanced Advantage Fund Growth (Regular Plan) and Kotak Small Cap Fund - Growth (Regular Plan) (Erstwhile Kotak Mid-Cap). No term insurance and there is company health insurance of my husband. I earn 10k per month.
Ans: Current Financial Situation

You have a combined monthly income of Rs. 1.10 lakh.

You have two kids aged 7 and 4.

Your monthly expenses include:

Rs. 31k home loan EMI
Rs. 30k home expenses
Rs. 15k for parents
Current Investments

You invest Rs. 3k per month in Aditya Birla mutual fund (equity-based) for the last 4 years.

You invest Rs. 7k per month in Kotak Mid Cap fund and Rs. 3k per month in Kotak Small Cap fund (last year).

You invest Rs. 50k per year in NPS for the last 5 years.

You have two LIC policies with a sum assured of Rs. 5 lakhs each.

Assessment of Current Investments

Your current mutual fund investments are good for long-term growth.

Equity mutual funds, especially mid-cap and small-cap, offer high growth potential.

NPS is a good investment for retirement savings, with tax benefits.

LIC policies provide some security but have lower returns compared to mutual funds.

Recommended Changes

Increase SIP in Mutual Funds

Consider increasing your SIPs in equity mutual funds.

This will help in wealth accumulation for your children's future.

Focus on a mix of large-cap, mid-cap, and small-cap funds.

Balanced Advantage Fund

Balanced Advantage Funds balance equity and debt.

They provide moderate growth with lower risk.

Consider allocating more to these funds for stability.

Avoiding Direct Funds

Direct funds need active management and expertise.

Regular funds, through a Certified Financial Planner, offer professional guidance.

They provide personalized advice and ongoing support.

Health and Term Insurance

You mentioned company health insurance.

Ensure it covers your entire family adequately.

Consider taking a separate term insurance policy for your husband.

Term insurance provides financial security in case of unforeseen events.

Review LIC Policies

LIC policies have lower returns compared to mutual funds.

Consider surrendering or partially surrendering them.

Reinvest the proceeds in high-return mutual funds.

Emergency Fund

Maintain an emergency fund for unforeseen expenses.

This should cover 6-12 months of living expenses.

Keep this fund in a liquid asset like a savings account or liquid mutual fund.

Final Insights

Your current investments are on the right track.

Increasing SIPs and adding balanced advantage funds can provide stability.

Ensure adequate insurance coverage and maintain an emergency fund.

Regular reviews and professional advice will help you stay on track.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

..Read more

Moneywize

Moneywize   |174 Answers  |Ask -

Financial Planner - Answered on Sep 26, 2024

Asked by Anonymous - Sep 25, 2024Hindi
Money
I am 40 with two children aged 12 and 9. I have a term insurance plan, but I’m wondering if I should invest in a child insurance plan for my kids' future education. Is it worth considering, or should I stick with mutual funds?
Ans: When planning for your children’s future, particularly their education, the decision between investing in a child insurance plan and continuing with mutual funds is crucial. Both options have their advantages, but choosing the one that best fits your financial goals and risk tolerance will ensure that you’re making the right decision for your family.

1. Understanding Child Insurance Plans

Child insurance plans are life insurance policies specifically designed to secure your child’s future. These plans offer a mix of life cover and savings, ensuring that in the unfortunate event of the parent’s demise, the child’s education and other financial needs are met. Here are some of the benefits and features of these plans:

• Guaranteed Payouts: Child insurance plans typically provide payouts at pre-determined intervals or at key milestones, such as when your child turns 18 or enters college. This ensures that money is available at crucial moments for educational expenses.
• Life Cover with Waiver of Premium: In case of the policyholder's demise, many child plans waive off future premiums while the policy remains active. This guarantees that your child will continue to receive the planned benefits without any further payments.
• Low Risk: Child insurance plans are generally lower risk compared to mutual funds, as they are not heavily market-linked. They are often tied to traditional savings or endowment plans, making them a safer, though lower-return, investment.
• Disciplined Saving: These plans are structured to encourage long-term savings, making them ideal for individuals who want a structured financial plan for their children’s future.

2. The Case for Mutual Funds

On the other hand, mutual funds, particularly equity and balanced funds, are popular investment vehicles for long-term goals like education. Here’s why they can be a more attractive option for accumulating a significant corpus over time:

• Potential for Higher Returns: Mutual funds, especially those invested in equities (large-cap, mid-cap, or multi-cap), tend to offer higher returns compared to child insurance plans. Historically, equity markets have provided better growth over the long term, making mutual funds an ideal option for goals that are 10-15 years away, such as your children’s higher education.
• Flexibility: Unlike child insurance plans, mutual funds give you the flexibility to adjust your portfolio based on market conditions, your financial goals, or any changes in your personal life. You can choose to increase or decrease your investment or switch between funds if needed.
• Transparency: Mutual funds offer greater transparency with daily Net Asset Value (NAV) updates, which reflect the current value of your investments. You can also easily track fund performance, fees, and other details.
• Diversification: Mutual funds allow you to diversify your investments across various asset classes, reducing overall risk while still having the potential for growth. This is particularly useful for parents who want to balance safety with the opportunity for higher returns.

3. Key Considerations: Which One to Choose?

When deciding between a child insurance plan and mutual funds, consider the following factors:

• Risk Appetite: Child insurance plans are low-risk, stable options for securing your child’s future. If you are risk-averse and prefer guaranteed payouts, a child insurance plan might suit your needs. However, if you have a moderate to high-risk appetite and are willing to ride the ups and downs of the stock market for potentially higher returns, mutual funds are a better fit.
• Time Horizon: Since your children are 12 and 9 years old, you likely have about 5-8 years before you’ll need significant funds for their higher education. This is a reasonable time horizon for equity mutual funds, which tend to perform well over the long term (5-10 years or more). A child insurance plan would also mature around this time, but with potentially lower returns.
• Goal-Specific Planning: If you are primarily focused on your children's education, you can select mutual funds that cater specifically to this goal. Equity funds, balanced funds, or even children-specific mutual funds (designed to save for education) can be tailored to meet the expected costs of tuition, living expenses, and more. With mutual funds, you can align your investment strategy directly with your financial goals.

4. Mutual Funds or Child Insurance Plan?

Given that you already have a term insurance policy in place, which secures your family in case of an unfortunate event, the additional life cover that comes with a child insurance plan might not be necessary. Instead, mutual funds provide higher growth potential and flexibility, which makes them more suited for long-term education planning.

In your case, where you have about 5-8 years before major educational expenses arise, mutual funds can help you accumulate a larger corpus compared to child insurance plans. You can consider setting up a diversified mutual fund portfolio, including a mix of equity and balanced funds, to maximize growth while mitigating risk.

However, if you’re looking for guaranteed payouts with lower risk and the security of a waiver of premium in case of death, a child insurance plan could still be worth considering. Ultimately, the decision depends on your financial goals, risk tolerance, and preference for flexibility or guaranteed returns.

..Read more

Ramalingam

Ramalingam Kalirajan  |7163 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Oct 05, 2024

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Thank you sir for your detailed evaluation and explanation. Please suggest which are better child plans? Can I open mutual fund in my sons name or I have to open in my name and then transfer when they start earning? Does stopping conventional insurance plans in between have any monetory losses?
Ans: When it comes to investing for your child's future, mutual funds via Systematic Investment Plans (SIPs) are often a far better option compared to traditional child plans like endowment or ULIPs. SIPs offer flexibility, higher growth potential, and liquidity. Here’s why SIPs in mutual funds stand out:

Higher Returns: Mutual funds, especially equity-based, have historically provided better returns than conventional child plans. Over a long horizon of 10-15 years, equity funds can outperform with compounded growth.

Flexibility: Unlike traditional insurance plans, SIPs in mutual funds give you the flexibility to change the amount, increase contributions, or even withdraw in times of need without penalties.

Liquidity: Mutual funds offer easy access to funds when needed for your child's education or other milestones. Traditional child plans usually lock your funds for longer durations.

Can You Open Mutual Funds in Your Son's Name?
Currently, you cannot open a mutual fund account directly in the name of a minor without appointing a guardian (usually the parent). The mutual fund account has to be in the name of the child, but under the supervision of the guardian (you).

Once your child turns 18 and starts earning, the account can be transferred to their name. Until then, you will manage the account, make decisions, and have control over withdrawals.

Process of Opening a Mutual Fund for Your Child
Open a Minor Account: You, as the guardian, can open a mutual fund account in your child's name. The KYC process will require both your and your child’s documents.

Transfer on Adulthood: When your child turns 18, the account can be transferred to their name, and they will take over managing the funds.

SIP in Your Name: Alternatively, you can start SIPs in your own name and later, when your child starts earning, transfer the corpus or investments to their name. However, capital gains tax might apply if you sell units for transfer, so consult a Certified Financial Planner before doing so.

Stopping Conventional Insurance Plans Midway: Monetary Losses
If you're considering stopping conventional insurance plans like endowment or ULIPs, it's important to understand the potential monetary consequences:

Surrender Charges: Traditional plans usually come with surrender charges if you discontinue the policy before the maturity period. These charges can reduce the amount you get back.

Low Returns on Early Surrender: These policies offer returns only when held till maturity. Stopping midway may result in lower payouts than the premiums paid, causing financial loss.

Bonus Forfeiture: Many traditional policies promise bonuses. If you stop the policy early, you may lose out on these accumulated bonuses.

What to Do Instead?
Rather than continuing with low-return child plans or insurance policies, you can:

Switch to Mutual Funds: Move towards SIPs in mutual funds, especially equity-based funds for long-term goals like education. These will offer higher returns over time.

Keep Insurance Separate: Always keep your insurance and investment goals separate. Continue with a term insurance plan for life coverage, and use mutual funds for wealth creation.

Final Thoughts
For your child’s future, SIPs in mutual funds are better than traditional child plans.
You can open a mutual fund in your child’s name, with you as the guardian, and later transfer it when they turn 18.

By choosing the right investment strategies, you can ensure a brighter financial future for your child.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

..Read more

Latest Questions
Nayagam P

Nayagam P P  |3935 Answers  |Ask -

Career Counsellor - Answered on Nov 27, 2024

Ramalingam

Ramalingam Kalirajan  |7163 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Nov 27, 2024

Asked by Anonymous - Nov 27, 2024Hindi
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Hi, sir I am a an 30 year old (single) engineer working with a MNC in Chennai, unfortunately till this day i haven't had any savings at all for my future (retirement, other short term or long term goals). Currently my take home salary after EPF and parental insurance is 53k ( EPF is about 4900/month - employee+employer) i haven't opted for Corporate NPS but is provided by the company without any additional contribution from company. I have company health insurance policy and have planned to take my own health insurance and term insurance plan. Adding to above I have zero emergency fund with me. How should I proceed with my investments?
Ans: You have taken the first step by recognising the need to plan. It’s essential to appreciate your intention to secure your financial future. Let’s look at how you can proceed to achieve your short-term and long-term goals.

Your current take-home salary is Rs 53,000, and your EPF contribution is Rs 4,900. However, you lack savings, investments, and an emergency fund. Here's a step-by-step strategy:

Build an Emergency Fund
Set aside funds to cover at least six months' expenses.

Start by saving 10-15% of your salary monthly into a high-interest savings account.

Use Recurring Deposits or Liquid Mutual Funds to maintain this fund for emergencies.

Secure Yourself with Insurance
Health insurance: Maintain your company health policy but add a personal health policy. Choose a policy offering a sum insured of Rs 10-15 lakh.

Term insurance: Buy a term plan covering 10-15 times your annual income. Keep the policy simple and avoid investment-linked insurance.

Budget Your Income
Allocate your income carefully for expenses, savings, and investments.

Use the 50-30-20 rule: 50% for needs, 30% for wants, and 20% for savings and investments.

Avoid unnecessary expenses to increase your saving capacity.

Start Investing Gradually
Short-term goals (1-5 years): Invest in debt funds or recurring deposits. Debt mutual funds are good for stable returns.

Long-term goals (5+ years): Invest in equity mutual funds for higher returns. Choose actively managed funds with consistent performance.

Avoid index funds. Actively managed funds have a better potential for higher returns through professional fund management.

Retirement Planning
Utilise the EPF for retirement. Your current contribution will grow over time with compounding.

Consider investing in diversified equity mutual funds for additional retirement savings.

Corporate NPS: You can explore NPS for its tax-saving benefits. However, don’t rely solely on it for retirement.

Tax-Saving Investments
Use Section 80C to save taxes up to Rs 1.5 lakh.

EPF, PPF, ELSS mutual funds, and life insurance premiums can qualify under this section.

Opt for ELSS funds for tax saving and wealth creation.

Review Existing Expenses
Evaluate and minimise unnecessary expenditures.

Avoid loans for discretionary spending like vacations or gadgets.

Advantages of Using a Certified Financial Planner
A CFP can help you plan holistically and ensure you stick to your goals.

They provide tailored strategies, ensuring proper fund allocation and monitoring.

Invest through a Mutual Fund Distributor with CFP credentials to access professional advice.

Key Steps for Discipline
Automate investments through SIPs in mutual funds.

Track your monthly budget and investment progress regularly.

Avoid direct funds. Regular funds offer professional guidance and fund distributor support.

Tax Implications
For equity mutual funds, LTCG above Rs 1.25 lakh attracts 12.5% tax.

STCG on equity funds is taxed at 20%.

Debt fund gains are taxed as per your income slab. Consider these while investing.

Final Insights
You are in the right direction by seeking advice now. Build a solid foundation with savings, insurance, and investments. Take small steps toward financial independence.

Remain consistent with your investments, and review your financial plan annually.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

...Read more

Mayank

Mayank Chandel  |1940 Answers  |Ask -

IIT-JEE, NEET-UG, SAT, CLAT, CA, CS Exam Expert - Answered on Nov 27, 2024

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Hello, i really have a serious issue regarding my studies as i am 24 yrs now and gave NEET 4times and i am still preparing for nxt year 2025 but at the back of my mind i am really tensed what if the same thing repeats in the neet 2025 also like paper leak and all, So now i am confused that should i take a full drop or partial drop. The mental pressure is really hitting hard and also its almost been 4years that i am still 12th pass only and my classmates have already completed their college and some are flight attendant and earning well, So this all things just hits so hard and also the hope in parents eyes as my father is already proud that i studied science so i would definitely become doctor. I wasted a lot of money in pg and coaching (fastrack) and this all things are hitting so hard that i really feel sad and have no ways to go.
Ans: Hi Bhima
I must say you have got perseverance & I appreciate your parent's trust in you. You have already appeared multiple times and you are going to appear again in 2025. By the time you will be 25 years old. They say there is no age to learn. But after getting admission you need another 10 years to practice as a qualified specialist. Make sure you take admission in the next session.

If higher cutoff & high fees of private colleges are an issue for you, then try exploring the MBBS abroad option, I can help with that too. Since NEXT is compulsory for Indian & Foreign graduates too it won't make a difference if you study in India or Abroad.

For time forget all the societal pressure and give your 100% and make your parents proud.

...Read more

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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