You might have been told about something that LIC offers like “Jeevan Anurag” or “Komal Jeevan”. The private insurers are new kids in the block and they have some fancy name as “HDFC Standard Young Star Plan” or “ICICI Smart Kids Plan”. At TFL, we find that these are just sales talk and they are nothing but stupid products available in the market.
At times we also find that parents or grandparents take policy in the name of their kids. Emotional sales takes place where investors take emotional decisions. Tell me if a parent takes insurance in the name of the kid, would he feels financially unsecured in case god forbidden anything goes wrong with the kid. The correct approach is, if anything goes wrong with bread earning parent, the kid is unsecured and not the other way round and hence the parent should be insured.
So nutshell is, NEVER BUY INSURANCE in the name of your kid. Always take term insurance so that in case anything goes wrong to you, the kid will be financially secured.
What other steps you need to take:
1. Do your home work to find out the expected amount of money required on your kid’s education and /or on marriage. Inflation should not be ignored while calculating future cost of education or marriage.
2. For young parents, you may consider a combination of SIP in diversified equity fund and PPF. Remember that equity is good when you are planning for long term goals. You may have more equity and less debt in your portfolio.
3. For parents whose kids are 10-15years of age, consider SIP and PPF. But you may have balance approach in your investment style.
4. For parents whose kids are now ready for higher education or about to get married in short time to come, investments meant for them should avoid equities and should be done in either debt based funds or Fixed Deposits.
Take for example, if you are young parent of a 3 year old child, your plan may be like:-
Current Total Cost of Higher Education: Rs.10 lacs
Current Cost of Marriage: Rs.20 lacs
Inflation factor: 6%
Age of Higher Education: 18 years
Age of marriage: 23 years
Current Investment for this purpose is not there.
Analysis shows us:
Total insurance requirement for bread-earning parent should be Rs. 30 lacs(Term Plan) as there is no investment as on date for this purpose. This may be taken on step down approach. Assuming that combination of PPF and Equity shall deliver 12% return p.a., we come on following figures.
Child Goals__________Higher Education__________Marriage
Expected Cost________Rs. 23,96,558/-___________Rs. 64,14,271/-.
Savings per month____Rs.4,797/-________________Rs.6,484/-
“This is just for illustration purpose and things may change depending on other conditions and factors.”