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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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22 Responses to Can You Design Your Own Customised Child Investment Plan ?

  1. Lalit says:

    The above explanation is very true and i have practically applied it for my first child with a term insurance of Rs. 10 million and SIPs of Rs. 26K per month. Its always very important to keep insurance and investment decision separate. A perfectly negotiated term insurance policy is a must to secure the financial well being of your family and for future cash requirement, a well advised SIP can do wonders. But, always remember to review your portfolio to see if you need to make any changes considering the market situations and your Goal.

  2. Banyan Financial Advisors says:

    Thanks Lalit. I do echo your thought !

    Regards
    BFA

  3. Anuag says:

    Thanks BFA once again for this excellent article. I wish maximum people read this and benefit out of it.
    Hats off to you for this wonderful job you are doing of showing guiding light in this dark financial jungle!!

    Best Regards,
    Anurag

  4. Banyan Financial Advisors says:

    Thanks Anurag. I am glad you liked the content.

    Regards
    BFA

  5. Shabbir says:

    I think this is what every investors should be doing because it just does not make sense to be paying such high charges for getting that small benefit which can be opted with simple maths and investing accordingly.

    The fear marketing policy is what makes any insurance product successful.

  6. Banyan Financial Advisors says:

    Thanks for your comment. Completely agree with you. I wish financial advisors play a much required role in educating the investor to prevent them from entering into costly financial mistake.

    Regards
    BFA

  7. ankur says:

    your blog was eye opener….you saved me from 3.4L per annum harakiri

    thanks again

  8. Salm says:

    Hi

    You have explained well. Congrats.
    But these strategies can apply only for those who have time and knowledge about maintaining such investments.

    How about people who are very busy or do not have likeliness to manage own fund and do all those home works.

    Majority of people belong to second category.

    Think about majority of people rather than focusing on less number of people who are well informed about investments and equity market like you.

    All the best

  9. Hi Salm,
    I do appreciate your views. I think it is here where financial advisors play a vital role in helping people in designing such products. I am not trying create business for Financial Planners, but just trying to put across that it is not as difficult as it sounds. You need some guidance to get it done and bingo ! I believe that it is a one time investment of a person’s time and isn’t it justified ? If you are planning for your future, shouldn’t you invest a bit of your time to know exactly what you are getting into ?

    It would be interesting to know from you what practical difficulties you are envisaging in designing such products ?

    Regards
    BFA

  10. Jignesh says:

    Yep it sounds great,
    I am not a fan of LIC at all.
    But when person have LIC , he is not at all worry as he is no more dependent on any market view/condition. and i think that is the only reason LIC is doing very high buisness.

    Overall in above Term plan + MF combo, person has to go under review and shall keep in touch with Financial Advisors. Well in absense of him and if family is not very much literated , very tough to follow instructions provided during planning.

    Good ARticle

    Regards

    Jignesh

  11. Thanks Jignesh. Really appreciate. I think it is due to lack of Financial Advisors that the agents have ended up mis selling the products which are not suited for investors. LIC is a stable company, but does it mean that one should invest their funds in what so ever investment options provided by them.

    Even the agents who are trying to sell LIC’s products don’t fully understand the products and the associated dynamics. LIC’s majority revenue comes from such agents.

    Regards
    BFA

  12. PAZ says:

    Hi

    really nice article. your way of explanation also very good. Please suggest me the MF name list (via SIP)for my child

  13. SRI says:

    Hi,

    Its really nice article and interesting in creating / investing.
    I have few doubts :
    Is it necessary to monitor market or company after investing ?
    If company or its stock went down – what will happen for our investment ?
    If that particular company closes or shuts down – how to collect the monies invested ?
    Currently, I have invested and taken policies on my name for my life coverage from Tata and LIC by paying Rs.40k p.a.
    Now, I would like to know secured investments for my family and child.

    Pls suggest and revert with your guidance for me move forward.

    Thanks in advance,

    Srinivas

  14. Srinivas,
    Thanks for your appreciation. My responses to your queries are :
    1. You would need to monitor the market / company if you invest directly into them. The larger the company (blue chips), the lesser is the monitoring required. This is to prevent being invested in a company is on down turn or eventually shuts down.
    The market value of shares is the value of your investment. If a company goes bust or closes down, you as a minority shareholder does have rights via courts – but it is not worth the efforts considering the value per share would be either zero or closer to peanuts. It is owing to all these havocs, i would suggest people to invest via Mutual Funds as then we have experts to manage our finances.

    The definition of ‘secured’ is very subjective. If you have over 10 years in your investment horizon, then Equity is the way forward with some Fixed Deposits. It is difficult for me to suggest you a portfolio composition without detailed discussion on your finances, liabilities, investment horizon, etc.

  15. Ajay says:

    Hi, Great article Indeed. I had almost decided to take a child plan for my newborn and co-incidentally came across your article. I shall appreciate if you could guide me on below points:

    AA) You have assumed that there is nil or very limited flexibility for choosing investment medium in case of a child plan. But few plans like HDFC Young Star super gives you the flexibility to choose where your investment goes : 100% equity (Opportunity/Growth), balanced or debt etc.

    BB) So in case the annual premium goes indirectly to the mutual fund of my choice (like HDFC Prudence, Top 200 etc).. would you say it is safe to invest in this particular child plan.

    CC) Above child plan also gives you flexibility to switch from Equities to mixed or Debt and vice versa anytime, sum guaranteed and balance premium payout in unfortunate case of demise of the investor.

    DD) As per latest IRDA guidelines, fund allocation charges has been reduced significantly and hence it shall be only 4.35% for first few yrs and then even less in later years.

    Shall appreciate your comparative views for the two plans. Thanks in advance

  16. Hi Ajay,
    I agree that out of the available Child Plans, this may sound relatively better. BUT it is still not good enough to stand infront of MFs.
    – Yes it has given a good flexibility for fund choices.

    From charge perspective, I would personally not put my funds in it. On a closer look :
    -Premium allocation charges are 4% for 7 years, 1% there after
    -Fund Admin charges 1.35% yearly
    -Policy Admin charges 0.35%, increasing 5% every year (subject to a max 0.4%).
    -Please note, that mortality charges are not yet included in this computation.
    This totals to around 5.7% for first 7 years and there after around 2.75%. Compare it with mutual fund charges of less than 2% per year. The decision is yours – after all the funds are yours.

  17. Uday says:

    Hi,

    A great article & an eye opener. I came across your article while searching a plan for my child future.

    Need your valuable guidance.

  18. Thanks. You can contact us for any further help at info@banyanfa.com

  19. Aman says:

    I want to invest Rs. 40000 per year. so which plan is best for me. I am govt. Employee … Or I have to invest in my pf fund..
    Please guide me…

  20. Aman,
    Unfortunately I can’t answer this question with just these details. Please could you email me at info@banyanfa.com about your requirements and contact number so that I can understand a bit more about you before recommending any product / solution.

  21. VIJAY says:

    Good marketing startegy in promoting your Financial service…Keep up the good work.One advice for all ‘BUYERS BEWARE’ i.e nobody out here are your well wisher ,its all business out here.Analyse & take your own decision.All the best.

  22. Hi Vijay,
    Appreciate your comment. But please could you suggest a better way to plan for a child’s future. Perhaps my readers may be able to learn from an educated person like you.

    I fully concur to your views that the decision is of the individual. All we can do is to provide more data points.

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