Is child plan better than a fixed deposit?

We all want to accumulate enough wealth to give our children the best education and throw a wonderful bash at their wedding. While the plans are big, sometimes a lot of us rely only on fixed deposits and other risk-free instruments to fulfill our dreams. However, have you ever realised that your fixed deposits may not be sufficient?

The cost of education is rising day by day. With rise in inflation, it is hard to ascertain the cost of a management program or a medical degree in 2030. Here is a snapshot of how things might be then:

Estimated cost of education after 15 years (under certain assumptions on inflation and historical trends)

With the current inflation rate and the trend in hike in fee of elite institutes, it can be very difficult to afford quality education for your kids. Then how does one get the maximum returns from our current investment so that it gives us a huge corpus in a few years to sustain the major expenses in our children's lives. Historical data suggests that a market-linked investment with a diversified portfolio over a long enough duration, such as 10 years, will give one of the best returns. However, we must not forget the risks involved with market fluctuations.

A child plan serves a dual purpose of protecting your child under any unforeseen circumstances and accumulating funds for her future.

Lump sum assured and a fund value: A child plan is designed to provide a lump sum to the child at maturity. It also provides financial security to a child, even in case of the death of the parent (insured) during the policy term. A fixed deposit, on the other hand, also provides the lump sum to the proposer at the time of maturity.

Payments at regular intervals: Besides the maturity proceeds, a number of child plans offer cash payments or withdrawals at specified intervals. The withdrawals or part payments can be used to fund your family's needs at critical times or support financial obligations that might be there. You get the dual benefits of life insurance coverage and the flexibility of periodic payments. A fixed deposit, however, does not lend such flexibility.

Waiver of future premiums: In a child insurance plan, a small portion of the premium is used to provide life cover to the parent and the remaining sum is invested as per the choice of the insured. In case the parent (insured) dies before the premium paying term, the insurance company waives off future premiums, if any, and funds them on its own. This way, the child gets the sum assured and all other benefits and bonus. For instance, if a parent expires after paying five premiums for a policy of 20 years, the rest of the premiums will be paid by the insurance company on behalf of the child and the fund value will be provided at maturity of the policy.

Child insurance plans offer liquidity. Insurance companies allow withdrawals after a stipulated time period. However, in case of such plans, you are not advised to exercise this option frequently as it can eat into your investment pool. Such insurance plans also do not levy any surrender charge after four policy years, i.e., an investor gets the full market value of his investments, net of charges, till date. This is unlike a conventional fixed deposit scheme where individuals tend to lose out on money on surrendering their FD.

Points to be considered while taking a child plan:-

·      Understand your risk appetite. High-return investments such as equity funds will have a higher risk attached to them compared to debt funds.

·       Analyses rates from major life insurance providers to find low-cost insurance plans for your child. You can compare different products available in the market easily through any online aggregator websites, along with the illustrations for each plan.

·       Always choose a policy that pays in the event of the policyholder's death.

·       Some child plans also insure the child's life, along with giving other benefits. You may like to have this additional cover.

·       There are certain plans in the market that allow you to withdraw money anytime. Look for such plans as they lend you the flexibility to access your money at will.

The author is chief executive officer of Policy Bazaar, an insurance portal. This article is for information purposes only and readers are advised to consult their financial planners before making a decision.