FINANCE TIP OF THE DAY
Can you afford your loan?!
Know the quantity of loan you can afford. The banks may sanction loan based on your income but you should look at your monthly expenditure and see if you can afford the maximum that banks offer. As a thumb rule, remember not to let your credit exceed 40% of your income!
Child insurance plans, ideal for your child?
When you pay the premium for this plan, part of the premium amount goes towards paying for the life cover. Remaining part of the premium is invested in various instruments either debt or equities. However this portion is quite small, as the insurance companies tend to deduct premium allocation charges upfront. These charges are meant to pay the distributor commissions. As a result, very small part of the premium gets invested during the initial years.
You have welcomed your new bundle of joy in this world with a lot of enthusiasm. You intend to give them the best of everything. In order to help you achieve this objective, you start investing in various instruments on your child’s behalf. To capitalize on the parents’ intentions about giving the best for their children, many insurance companies have introduced children’s plans. These plans have enticed many parents to invest on behalf of their children, under the impression that their child’s future is secure. But is it true? Are they worth investing? Is this the best investment option for your child? Let’s take a look at what these plans are all about.
- What are children’s plans?: Children’s plans are insurance-cum-investment plans offered by insurance companies are similar to ULIPs. However the difference between a ULIP and a children’s plan is that the parent starts investing in the children’s plan right from the time the child is born and can withdraw the savings once the child reaches adulthood. Of course, some plans do allow intermediate withdrawals, at certain intervals.
- How much insurance do I get?: These plans do come with inbuilt insurance component in order ensure the sum payable to the child is insured against the premature death of the earning parent. The least life cover you have to select in these plans is: Sum Assured = Term * Annual premium / 2. But in most instances this sum assured is inadequately woeful. Experts recommend that it is necessary to buy a life cover of minimum of 7-10 times the annual income of the earning parents. This is to ensure that in case if the earning parent meets untimely death, his/her spouse and the child are adequately provided for. So if you are relying only on the life cover provided by these plans, then remember you will always remain under insured.
- What about the investment?: When you pay the premium for this plan, part of the premium amount goes towards paying for the life cover. Remaining part of the premium is invested in various instruments either debt or equities. However this portion is quite small, as the insurance companies tend to deduct premium allocation charges upfront. These charges are meant to pay the distributor commissions. As a result, very small part of the premium gets invested during the initial years. Also if you opt for any features provided by the insurer like waiver of premium, switching option etc., the charges for the same are deducted from the amount invested. So the returns from these plans tend to be very low in the initial years and if you stop the plan without completing the entire tenure, you might end up suffering loss.
- Disadvantage of the children’s plans: These plans do rate poorly both in terms of life cover and investment option. You can buy plain term insurance at lower premium that provides you with very high life cover. For investments, equity mutual funds are the best. You can invest the highest possible amount in these funds at very low fees. Also if the fund tends to perform poorly, you can stop your investment and switch over to another fund, without paying any penalty. This is not possible in case of children’s plans as there are heavy surrender charges applicable.
- Are they right for me?: One needs to evaluate if they are an ideal option. More often no they are not. While they do provide you with tax benefits, you can get the same tax benefits with a combination of term insurance and mutual funds. Also, term insurance + mutual fund combination beats the children’s plans on the fronts of costs and returns. So it is better to give these plans a miss and instead go for term plan and mutual fund.