An engineering course was priced was Rs 1 lakh in 1990. It rose to Rs 3.2 lakh in 2000. In 2020, even at a low compounded annual rate of 10 per cent, the cost could be as high as Rs 21.5 lakh.
So savings for the child's future has become quite pertinent. And there are a large number of options to achieve this - fixed deposits, mutual funds, insurance schemes and many other instruments.
If you want to take the insurance route, there are options of endowment and unit- linked insurance plans. But before you buy, look at various issues.
There are child plans that cover the child or parent. The latter option is better because there is no need for the child to have a cover because he does not have any liabilities and dependents.
There are a lot of choices. There is single premium or yearly premium policies. In some others, risks are covered up to seven years, after the policy has expired.
Typically, child plans start from the age of 7-8 years. Read the fine print carefully, to find when the scheme really starts. For example, an insurance company may specify that the risk cover would function within two years from commencement of policy. Some others say that the policy starts immediately after the child's seventh birthday. The most important question is what should be sum assured. Depending upon your financial status and goals, go for a policy.
Premiums are no longer a costly affair. Some policies are as cheap as Rs 700 per month. There are other options as well. Insurers may even permit a person to pay the premium every five years. There are discounts on premiums as well. There are options like a 2 per cent rebate, if yearly premium is made and 1 per cent, in case of half-yearly payment. For example, if one takes Rs 5 lakh policy or more, the insurance firm may give a 2 per cent discount.
Always take a waiver of premium rider, because the policy stays alive, even if payments are not made. This will ensure that even if something were to happen to you, the policy continues. If there are in-built premium waivers, it spares the bother of taking a separate rider. Otherwise, the cost of a rider is nominal. It may be as low as Rs 125 only.
Also, time the policy properly so as to get the payouts at the right time. Ideally, money should be handed out at important milestones in kid's educational and career graph.
For example, the first payout can be at 15 years, which goes towards school studies, tuitions and preparation for professional course entrance examination. It can be 20 per cent of the sum assured or policy money.
The second payout can take place at 17 or 18 years, which meets costs of joining a college or professional course. The amount is 25 per cent of sum assured, now.
The third payout, at 20 years meets higher or post-graduation studies expenses and may be 25 per cent of sum assured, again. The final payout is handed, on turning 22 years, when money is allocated for studies abroad, or professional course or setting up factory, practice or business. The amount stands at 30 per cent of sum assured, supplemented by bonuses and guaranteed additions.
Select the manner of payout carefully. You can settle for a lump sum or regular instalments when the child is three, six, nine, 15 and so on. There is even a provision for getting a sum for wedding in the 25th year, if the offspring wants to tie the knot.
There are no risks, at all, where guaranteed additions are packaged in by the insurer.
There should be both bonuses on the sum assured as well as compounded reversionary bonus. The latter ensures that the bonus is earned on existing bonus.
AN IMPORTANT CHECKLIST:
Sign in for a unit-linked plan, if there's a profit fund, because risks are eliminated. No erosion of investment takes place.
There is another way, in which unit-linked policy can be of use to the child. If the little one is a classical dance expert or a budding tennis player, a parent can take a unit-linked policy, besides the regular one. It would meet costs of expensive extra-curricular activities, as returns may be exceptional.
It's not known that a rider amount, up to Rs 10,000 can be claimed as tax exemption. Hence, not only is tax deduction of Rs 1 lakh spent on premium payments allowable under Section 80C, even the money received on maturity also fully exempt, under Section 10 (10D) from tax. Even the riders get income tax benefits.
Finally, find out what are the administrative costs? For example, a policy's administration costs may be moderate, but premium allocation charges or money deducted from your premium towards agents' commission can be on high side. It can be as high as 60 per cent, which can wipe out low administrative costs.
There are a lot of policies that give double benefits. For example, there are schemes that allow savings for two children with one plan.
Also, making the wife nominee helps distribute insurance proceeds among all children.
If you are buying child insurance plan, be as cautious as possible. Meaning? No kidding.
