Lokesh Bhatia is 33 years old and has two children, aged 1 and 5. He earns a good income, expects to do well in his career and wants the best education and care for his children. Recently, the relationship manager of his bank talked to him about the need for taking a child education insurance policy to cover the future educational expenses of his kids. While the idea has appealed to Lokesh, he is not sure if this is the best way to do it. He has been investing for the past few years and has a fair idea of the options available to him. He wants advice on the factors he must consider while making a decision on investing for his children's future.
Lokesh should evaluate the available investment options in such a way that he understands whether these will help him provide for his children in the most efficient way. The facility to invest small amounts in funds, such as equity, debt or a combination of these, over a period of time to build a corpus, is available in child education insurance policies as well as investments such as mutual funds. The difference between the two lies in the protection that the insurance plan provides and the premiums that have to be paid. In the unfortunate event of Lokesh's demise, not only will the sum assured be paid to the family but the premium payments will also continue for the full term. For Lokesh, the motivation to continue with an insurance-linked payment may be stronger than in a pure investment product, especially when the markets are volatile.
Lokesh will have to consider the cost involved in the additional benefits that the insurance product provides. A portion of the premium paid will be allocated to charges instead of being invested for beneficiaries. Moreover, the high upfront charges on insurance products make them an expensive proposition to exit even if the fund is performing poorly.
Lokesh can replicate the same benefits at a lower cost by purchasing a term insurance for a sum that reflects the value of all his future goals, including the children's education. This must be combined with an investment plan in mutual funds, preferably with a commitment such as a systematic plan (SIP), so that the required corpus can be built easily. In the event of Lokesh's demise, the insurance amount will be available to meet the goals, along with the fund value. Such a plan also provides the flexibility to take corrective action if the investment is not working as expected.
If Lokesh and his family are able to make appropriate investment decisions and continue with them, then he must go for the more cost-effective and flexible option. If not, he should consider the insurance option, which will at least ensure that his children's needs are taken care of.
Source: economic times