Planning for your child's secure future

Planning for your child's future is no longer about putting money aside in a savings bank account, or setting up fixed deposits. In this day and age, you might even call it outdated, and inadequate. You find that the returns on your investments in PPF (Public Provident Fund), NSC (National Savings Certificate) and fixed deposits (FDs) have dropped from 12% to 8% (in the case of NSC), and the consequences of inflation are all too obvious.

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Traditionally, parents would save towards their child's education, marriage, and perhaps funds for a future business. However, look a little deeper, and you will find instead that you have to grapple with a time frame within which the fund must be built, decide on the age by which this fund will be made available, factor in how much it will actually take to grow this corpus, and determine the investment routes you will pursue to achieve these ends.

So how do you go about achieving all this? The answer to successfully providing for those important stages in your child's life is insurance; specifically, child insurance. What exactly is child insurance, and how can you make it work for your child?

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Child insurance provides cover for a child's parent/guardian/grandparent for a specified term. That is, if the parent, guardian, or grandparent were to pass away, your child's future is not in jeopardy. If, however, this were to happen, your child would receive the sum assured in the policy plus bonus/ participating profit/ guaranteed addition, if any, or the value of the investments, at a pre-determined age, and this money would be receivable irrespective of whether the proposer i.e. the parent/guardian/grandparent survives the term of the policy.

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Insurance, as you know, can assist in planning for the important milestones in your life, but it can also provide for your child's future. It is a dependable route that secures the child's future in case of any unfortunate event.

Money back endowment plans for instance, tell you roughly how much you can expect and at what age (of the child) the money will be due. With money back policies, your child would receive fixed portions of the sum assured at regular intervals. On maturity, your child receives the balance sum assured, if any, plus the bonus/participating profit/guaranteed addition, if any, or the value of investments, whichever is higher.

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There are two variants available to parents these days: traditional child plans and unit linked insurance plans (ULIPs). Understand that the primary difference between them is in the way their premium is invested.

Traditional endowment plans carry a relatively lower risk since they are invested mainly in corporate bonds and government securities. The bonuses are stable and give you considerable comfort knowing roughly how much you can expect. Regular endowment plans are suited for parents with a low risk appetite.

Parents with some risk appetite can opt for a ULIP child plan that invests across equity and debt markets. ULIPs are flexible, in that they allow you to switch across options (between debt and equity). They also allow for a larger number of withdrawals, and in some plans, multiple withdrawals are permitted every year. ULIP child plans can prove to be significant is because over the long-term (15-20 years), equities can add considerably to the corpus you plan to build for your child's needs. Debt brings stability to a portfolio.

The most favourable aspect of a child insurance plan is that the money is clearly earmarked for the use of the child at a target date for a particular purpose, be it education or marriage. Knowing that you are working towards providing for your child's future through a children's plan will give you the funds at the right time to take his/her dreams forward.

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