What is a child savings plan?1
A child savings plan is a long-term plan designed to support a child’s future and dreams with a life insurance component and a market linked investment component combined. Under this plan, a parent can invest and grow money to create a corpus for the child’s future goals while ensuring a safety net of financial backup if he/she dies an untimely death. As a parent, you may find it beneficial to ensure your child has sufficient financial resources in the future to support his/her life goals, even if the costs have risen over time.
How does a child savings plan work?
The life insurance component in a child savings plan provides life coverage for the parent like any other insurance plan and provides the sum assured to the child in the event of the unforeseen to help him/her continue with his/her studies. The investment component, on the other hand, lets the policyholder invest and grow money subject to market linked risks, which is handed to the child upon maturity of the policy. This takes care of the corpus building and the inflation to fund the child’s higher studies or other goals like marriage[1].
The uniqueness of child savings plans, however, lies in their waiver of premium feature. Here, even if the parent dies and the death benefit is paid, the policy continues to be active, and the premiums are borne by the insurer to pay a maturity benefit at the due time. The maturity amount in these plans can be paid in a lump sum at a particular age of the child or through regular payouts at different stages of his/her life. Thus, a child savings plan provides a solid financial backup to help the child’s academic career grow in the desired way, no matter what.
Let’s now get back to the question – when to purchase savings plan for children?
The right time to buy savings plan for a child
There is no specific best age to buy a child savings plan. Rather, the right time to buy a savings plan for a child may vary across individuals depending on the desired academic goals and the financial circumstances of the family. The basic idea[2] is simple— creating a substantial corpus over the years that would help the child reach career or personal milestones in the future without having to worry about the rising costs.
Ideally, when it comes to investing in a child savings plan, a parent should start as early as possible. This may enable him/her to regularly invest a tiny amount for a long period of time and get back a sizeable corpus through the power of compounding.
However, the following are the factors that can help you decide when to purchase a savings plan for your children.
The goals[3]:
The first and foremost factor here is to identify the goals or milestones for your child that you desire to fulfil with the savings, like funding your child’s overseas course, his/her admission in a good business school, or a lavish marriage ceremony. Unless you have the clarity of the specific goals, accumulating a fund may seem daunting, and in turn, it would be difficult to decide when to start a child savings plan.
The investment horizon[3]:
How long to stay invested may be the question that puzzles most when you plan to buy a child savings plan, because the best time to buy the policy should align to this time frame. Experts believe the period of investment should ideally depend on the milestone to be fulfilled, the time when it requires the corpus. Suppose Mr. A has a 2-year-old son and plans to send him to the best medical school when he is 18. So, in between he has 16 years and can purchase a plan whenever the financial situations are favourable.
The amount needed[3]:
The best age to buy a child savings plan may be based on the amount needed at maturity to fund the target milestone, keeping in mind the average cost and inflation. Accordingly, a parent may figure out his affordability and decide when to purchase a savings plan for the child. For example, suppose Mrs. B dreams of marrying off her daughter, now 10- years -old, when she is 25. Say after 15 years, she plans to spend Rs 20 lakhs for the wedding, taking into account the inflation rate.
The current scene[3]:
While saving for the child’s future through a child plan, it’s equally important to assess your current financial situation. Take note of the assets and the debt outstanding (if any).
The child plans grow money through compound interests. Needless to say, the longer the money stays invested, the bigger it gets through the accumulation of interests and returns. Starting early may therefore seem a win-win if you are financially stable enough to do that!
FAQs
Q1: Is it good to invest in a child savings plan?
Yes, it may be worth[1] it to invest in a child savings plan. The uniqueness of these plans is that they remain active even after paying the death benefit, and the insurer takes care of the remaining premiums. Once the policy expires in its due time, the nominee receives maturity benefit as well subject to the t&c of the policy.
Q2: What are the different types of child savings plans?
Child savings insurance plans are majorly of two categories[1]: i) Plans with market-linked return and ii) Plans with guaranteed* return. The first kind of plans invest a portion of the premiums paid into equities/debts/hybrid funds which lets your money grow in long term with returns subject to market fluctuations. The second category plans on the other hand offers stable, fixed and guaranteed* returns subject to policy t&c.