Can You Design Your Own Customised Child Investment Plan ?

It is good to see you reading this article and probably you may also be wondering if it is a good idea to have a Child Plan based
investment product from an Insurance Company to secure your child’s future and to free you from one of your biggest liabilities. If you have already made up your mind to go with such category of investment product, probably after going through this article you may want to have a second thought.

 

What actually attracts people towards Child Plans from Insurance Companies

The biggest attractive part of a child plan is the Power of Marketing – Yes I really mean it. In the current tough times faced by the Insurance Companies, they are using the biggest emotional arrow to sell their investment solutions – “Love & responsibility of a Parent towards their Child”. Who wouldn’t want to leave their children with a handsome pot of money to serve their needs in future ! Use these couple of sentences and I am sure that your listener will give you more focus than he earlier wanted to. There are other goodies too which are attached with the Child Plan which tries to attrack gullible investors like honey bees. Broadly the following features appear in most of the Child Plans in a closely bundled product :

1. Financial Security : If the person dies, a lumpsom sum assured would be paid to his child. Hence the investor should not be worried of the child’s well being after the death of the investor;
2. Investment Lump sum : Upon maturity of the policy, the investor would be provided a lump sum amount which could be used towards the child’s education / other expenses. This would be paid irrespective of the death of the investor.
3. Regular Income : A specific percentage (generally 10%) of the sum assured to be paid to the family in case of death of the investor before the maturity of the product. This amount is paid upto the maturity date of the product. This is aimed to meet the expenses of the family.
4. Hassle Free : This is one of the biggest advantage portrayed by Insurance companies while marketing their Child Plan based investment solutions. Just keep on paying premiums every year, year on year and reap the benefits after maturity. For an investor, what else could he demand. His life gets secured. His child’s financial future gets secured and that too without any mental hassles. Lovely – isn’t it ?

 

What are you paying to get the benefit out of Child Plan ?

Hassle free life doesn’t come cheap. Lets take an example of one of the Child Plan products in the market – LIC’s Jeevan Ankur. As per LIC’s website “LIC’s Jeevan Ankur is a conventional with profits plan, specially designed to meet the educational and other needs of your child. If you are the parent of a child aged upto 17 years, LIC’s Jeevan Ankur is the most suitable insurance plan for you which ensures that your responsibilities are met whether you survive or not and without depending on anyone else.” 

To help you understand how this product works, we are assuming that :

• Your age is 30 years;
• You are after a sum assured benefit of Rs. 50 lacs to be paid on maturity;
• Maturity of the product is after 20 years for LIC’s Jeevan Ankur policy.

Based upon above assumptions, you would have to pay an annual premium of approximately Rs. 206,750 for next 20 years. The total amount which you shall pay over 20 years shall be Rs. 41,35,000 (approx 41.3 lacs). In return you would get the following :

1. On death of the investor at any time during the policy tenure, Rs. 50 lacs will be paid to the nominee plus a regular income equal to 10% of Sum Assured, i.e. Rs. 5,00,000 shall be paid every year till the end of the policy tenure.
2. If the investor lives up to the maturity of the policy, he shall get the maturity amount i.e. Rs. 50 lacs along with loyalty additions. This addition is not fixed at the time of entering into the policy and would depend upon “LIC’s experience of the policy“.
3. Loyalty Addition(LA) : If we consider the illustration provided by LIC, based upon different scenarios, the LA can be any where from zero to more than the sum assured. Hence the actual amount can be either 0 to 50 lacs or more.

So what is the overall return ?

• If we consider that LA is zero, the overall return for Rs. 41.3lacs premium paid would be Rs. 50 lacs – a return of 2%
• If we consider that LA is 50 lacs, the overall return for Rs. 41.3lacs premium paid would be Rs. 100 lacs – a return of approx 8%.

You may notice that just looking from financial perspective, the returns are not really mouth watering ! I would rather classify them as sub-standard return considering the investment amount had 20 years to grow !

 

What Alternatives Do I have ?

This is THE QUESTION which I would want all the potential investors of any child plan to think before locking themselves into a multi year investment product offering very limited flexibility to give the investments a room to grow. An alternative of a child plan can easily be designed and executed with very limited hassle. Every drop of hassle in this procedure is really worth it !

In order to understand how to design your customised child plan from the available instruments in the financial markets, I would like to break the benefits offered by a child plan into its actual components and then look into the ways to secure such benefits. In the below mentioned steps, I am assuming the same requirements as mentioned in the Child Plan assumptions above (Age 30 years, 20 years duration and 50 lacs requirement).

 

STEP A. Term Insurance

A child plan offers a security to the investor that in case something happens to him / her, the family would get a lumpsom amount to cover the expenses as well as a yearly amount till the end of the policy tenure. Lets see how you could go ahead building such a security net :

1. Get a Term Insurance for 60 lacs with additional riders such as Critical Illness. More details on a Term insurance can be found on our article Term Insurance – First Step Towards Financial Planning. This step will ensure that if a death event happens, your family will get a lump sum amount to take care of the expenses.
2. The cost of your Term Insurance for 60 lacs should not be more than approx Rs. 15K per year.
3. Prepare a written instruction for your wife / family member to invest the entire amount / part amount into a fixed deposit with a bank to get a monthly / quarterly / yearly income to support monthly expense.

The advantage of taking this route is that you have the flexibility to decide how much sum assured would be paid as a lumpsom to your family in case of a death event. And further on how much amount should be invested to generate a regular income. You can also choose whether the regular income comes monthly, quarterly or yearly.

 

STEP B : Start a Monthly Investment Plan

This is the most critical part of your financial plan to ensure that you tackle with the financial requirements after 20 years. Since you have a budgeted requirement for Rs. 50 lacs after 20 years, you would need to invest a monthly amount to allow your investments to grow to Rs. 50 lacs.

In the above Child Plan example, Rs. 41 lacs grew to Rs. 100 lacs in 20 years with a yearly investment of Rs. 206,750 (montly approx Rs. 17K). Assuming that you have the same investable amount per year Rs. 206,750 per year out of which you pay Rs. 15,000 towards Term Insurance mentioned in Step A, you would have around Rs. 190,000 per year to invest (approx Rs. 16K per month). This Rs. 16K should be invested on a monthly basis based upon a carefully thought investment plan.

Arrive at in investment plan

• The biggest thing at your side while creating a child plan is a 20 years time frame. Over this period, the asset class which would give the best returns would be Equity. Hence you should aim to invest a significant portion of your Rs. 16K per month kitty into Equity market.
• My best pick is to go for a monthly Equity Mutual Fund SIP of Rs. 10K per month for next 20 years. You can refer to  our article How SIPs work for more details.
• SIPs should be into a good mix of Large Cap, Mid Cap, Small Cap, Sector & Gold sector to create a diversified mix of Equity investment portfolio.
• Remaining Rs. 6000 may be invested in a seperate PPF account which you can open in your child’s name. This account would be initially valid for 15 years and after expiry of 15 years, you should renew it for another 5 years.

So to summarise, you would be investing Rs. 10K into Equity Mutual Funds and Rs. 6K into PPF account. Above is just an example, you can choose from many mixes of investment options available to build up the investment kitty. If you follow the MF + PPF route, the expected returns can be some where as follows :

 

Mutual Fund Returns

Considering that you are investment Rs. 10,000 per month for next 20 years, the total investment amount would be Rs. 24 lacs. With a very pessimistic approach your value of MFs after 20 years should be some where between approx Rs. 80 lacs (at 10% returns) to Rs. 150 lacs (at 15% returns). If you are lucky then this amount can even reach over Rs. 3 crores (at 20% return).

 

PPF Returns

Based upon our plan mentioned above, Rs. 6,000 per month would be invested into a PPF account. PPF currently earns around 8.6% p.a. However considering that the rate keeps on changing, I would assume the rate to be at 8% average for next 20 years. Over this duration you would have invested Rs. 14.4 lacs. The value of your PPF account after 20 years should be approximately Rs. 35.5 lacs.

 

Total Returns

An easy to analyse tabular representation of your investment plan as a result of your Step B activity would look something like this :

Investment	Monthly	Yearly	Total Amount Invested in 20 years	Investment Value After 20 years
				Scenario A	Scenario B
Mutual Funds	10,000	120,000	2,400,000	8,000,000	15,000,000
PPF	6,000	72,000	1,440,000	3,550,000	3,550,000
Total (in numbers)			3,840,000	11,550,000	18,550,000
Total (in words)			Rs. 38.4 lacs	Rs. 1 crore 15 lacs	Rs. 1 crore 85 lacs

Scenario A -> Mutual Funds Growing at 10% per annum                  Scenario B -> Mutual Funds growing at 15% per annum.

 

STEP C : Contingency Planning

In this step the investor should create a well documented instruction which prepares your family to handle the financial situation once he / she is no more there. Broadly speaking, you would want to create a document which mentions the following points :

1. Your Term Insurance Details such as name of the insurer, claim procedures, etc.
2. List of your Mutual Funds, their account number, monthly investment amount.
3. PPF Account details
4. Plan to invest the lump sum funds received by the family via Term Insurance in Step A above in case of the death event.
5. Procedure to maintain investments into your investment vehicle mentioned in Step B above out of the proceeds received from Term Insurance / monthly investment amounts received from investing the lumpsum funds.
6. Most Importantly, the Will which mentions who is entitled to the funds subsequent to the death of the investor.

 

Total Cost of your Customised Child Investment Plan

Once you have gone through Step A to Step C, you may find that you are in total control of your finances. It is now a perfect moment to do a quick comparison between the Child Plan as per the Insurance Companies and your Customised Child plan to identify the differences and choose the best option.

Factors for Comparison	Child Plan
	Insurance Company	Customised Plan
Yearly Investment Amount	206,750	206,750
Tenure	20 years	20 years
Maturity Amount (Scenario A)	50 -60 lacs	1 crore 15 lacs
Maturity Amount (Scenario B)	100 lacs	1 crore 85 lacs
Protected against Death Event of the Investor	Yes	Yes
Regular Income till Maturity (in case of death)	Yes	Yes
Flexibility to choose investment options	Nil – Very Limited	Fully Flexible
Control Over The Plan	Nil – Very Limited	Full Control

 

Conclusion

I would want to avoid giving a conclusion on this article and would want the individual readers to leave a comment as to which option do they consider is a better option / choice.  After going through above facts, you may be in a position to take a decision which would reflect your requirements. There can be only two option :

1. It doesn’t sound that tough / complicated to make my own Child Plan ! I shall avoid the products offered by the Insurance Companies and would prepare my own independent Child Plan. OR
2. Nah ! It is too complicated for me. I want a peace of mind and for that I am happy to sacrifice the returns. Child Plans offered by the Insurance Companies is what I would go for !

If you need any help in creating your customised child plan, please feel free to contact us. We have already helped multiple of our readers in creating such plans to suit their individual requirements.

Good luck !

 

The numbers and facts represented in this article are approximate figures. The reader must perform their independent calculation before making any financial decision.

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• How to Compute Appropriate Sum Assured for Your Life Insurance
• How Long Should I be Insured ?