When it comes to your child there are no compromises, especially in education costs. Common sense tells us that the sooner we start saving and investing towards this goal, the more we gain. However, don’t make the mistake of choosing a traditional child plan by insurance providers or even a unit linked insurance plan or ULIP to do this.
Why is this a mistake? You can thank the high costs attached. What could be the alternatives? Combining mutual fund products with a basic term insurance plan is going to be more remunerative and cost effective. Here is what you need to know.
Why a ULIP doesn’t work
The marketing of ULIPs, especially child plans, tugs at your heart strings with little connect to actual gains. In reality you will end up paying too much for little benefit.
Whenever investment is linked to an insurance, additional costs like mortality, premium allocation, policy administration and so on get added with the cost of fund management. The newer versions of ULIPs return mortality charges at maturity if no death benefit has been claimed, but other charges remain imbedded. While a return of charges sounds good, deducting them at the time of investment brings down the potential return.
The other aspect these plans promise is to take over the premium and continue the policy if you are not around anymore. Sounds great as you think that your child’s education expense will not suffer if you suffer an untimely death. You don’t need a ULIP for that. A term plan can achieve the same outcome at a much cheaper cost.
Numbers don’t lie
Here are the numbers. Let’s say, you are 30 years and planning for your daughter’s higher education cost as soon as she is born. Let’s assume you go for the all enticing ULIP. Usually, the recommended plan will be one that offers a premium waiver on death (policy continues as it is) and return of mortality charges at maturity (where no death benefit is claimed). For a Rs 5,000 monthly premium, 18-year policy term or maturity, you will get a sum assured of Rs 6,00,000 on death.
The expected fund value at maturity calculated at 8% per annum is around Rs 19.5 lakhs as per the online calculator on a leading life insurer’s website. Of course, you have the choice of various fund options – equity, debt or hybrid and switches between them.
If instead you invest Rs 5,000 per annum in a mutual fund SIP with the expected 8% per annum return, your total return amount at the end of 18 years is likely to be around Rs 24 lakhs. Add to that a term life insurance policy of Rs 1 crore sum assured which comes at an annual premium of around Rs 7,700 (Rs 138600 for 18 years); your net return is around Rs 22.6 lakh.
The return numbers for traditional non ULIP child plans are even worse. If you want to secure your child’s future, look beyond the soft advertising around child plans. The wiser course of action would be to keep investment and insurance separate; this is the only way to maximise return and minimise cost in the long run.