Nirav is a 35-year-old father of two. His bank’s relationship manager has advised him to buy a child education insurance policy to cover his children’s future education expenses. While the idea appeals to him, Nirav wants to know if there are better ways of ensuring the best education and care for his children, even if something untoward happens to him. He wants to accumulate a corpus for his kids but needs advice on the factors he must consider while making the decision.
Nirav should evaluate which of the available investment options helps him provide for his children in the most efficient way. He can invest small amounts in equity, debt or a combination of both through the child education policies or through mutual funds. The differentiator is the protection that the insurance plan typically provides to the premiums. In the unfortunate event of Nirav’s death, not only will the sum assured be paid to the family but the premium payments will also continue for the full term. Thus the motivation to opt for an Ulip may be stronger than continuing in a pure investment product like a mutual fund, especially when markets are bad.
However, Nirav must consider the costs involved for the additional benefits that the insurance product provides. A portion of the premium will be allocated to charges rather than invested. Moreover, the high upfront costs on the insurance product will make it an expensive proposition to exit even if the returns are poor.
Nirav can replicate the same benefits at a lower cost by taking a term insurance for a sum that reflects the value of all his future goals, including children’s education. This must be combined with an investment plan in mutual funds, preferably through SIPs, to build a corpus. SIPs should help him stay the course rather than invest on and off. In the event of Nirav’s demise, the insurance amount will be available to meet the goals along with the fund value. This will also give him much-needed flexibility to take corrective action if the investment does not work as expected. Nirav has to opt for the more cost efficient and flexible option.
(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)