Financial Planning For Children Education

What is financial planning for children’s education?

 If you don’t plan for children’s education, you could fall short of money. College fees and fees for vocational and professional courses are quite high these days. MBA and engineering studies are really expensive. The cost of foreign education is sky high. You definitely need financial planning for children’s education.

1.      Do you really need a child education plan?

Take a look at these figures. Fees at top MBA colleges in India like the IIMs, XLRI, IIFT, NMIMS are around Rs 15 Lakhs and above. Top IIMs could charge around Rs 20 Lakhs. Most Tier B private colleges charge in excess of Rs 15 Lakhs. Most Tier A private colleges charge in excess of Rs 20 Lakhs. Medical studies could go beyond Rs 50 Lakhs. With rising inflation and high education costs, you definitely need a child education plan.

2.      Features of a child plan

·         Flexibility in premium payments: An ideal child education plan offers flexibility in premium payments. Child education plans have annual, half yearly or the monthly payment option. Choose a child education plan which offers options of choosing premium payments of your choice.

·         Choose the appropriate child education plan tenure: Child education plans have policy terms ranging from 5 to 25 years. Depending on needs or how soon you avail a child education plan, choose an appropriate tenure. An ideal child education plan should be flexible vis-à-vis policy tenure. Do remember that higher the policy tenure, greater are the chances of the child education plan fulfilling intended objectives.

·         Check partial withdrawal clause: A financial emergency can strike anytime. A child education plan must have a partial withdrawal clause, so that you can withdraw money in times of emergency. A partial withdrawal clause helps meet immediate liquidity needs while keeping long-term financial goals like child education intact.

·         Choice of funds to invest: A child education plan takes your money and invests it in financial instruments depending on the type of the plan. Child education plan invests money in equity, debt or money market instruments like CDs, commercial paper or even reverse repo. An ideal child education plan must offer systematic transfer plan or the dynamic fund allocation option. You can change the allocation vis-à-vis equity and debt markets. Insurers make allocation automatically with the initial investment in equity and as corpus grows, money is shifted to relatively safer debt.

·         Child plans with waiver of premium benefit: A child education plan with waiver of premium benefit continues even after the death of the policyholder. Make sure you avail waiver of premium rider with child education plan. On the unfortunate demise of the parent within the term of the plan, the insurer pays the sum assured immediately to the guardian of the child. (This is if the guardian is the nominee). With the waiver of premium rider, the plan doesn’t end here. The insurer keeps the plan active and funds the policy by paying the remaining premiums. The money keeps growing and the child/nominee gets the maturity amount as a lump sum on maturity of the plan.

3.      Advantages of a child plan

A child plan secures children’s education. Money collected is used for higher education. Find this difficult to understand? I’ll explain. The cost of an MBA from a reputed college could be Rs 15 Lakhs. It could go up to 25 Lakhs, say 6-7 years from now. A child education plan takes inflation into account when giving you a lump sum at maturity. You have pre-determined payouts. You get money at various stages of a child’s life. Money can be used to meet short-term and medium-term financial needs. You can choose investment mix. Opt for debt or equity depending on financial needs and risk profile. Equity though risky, helps achieve financial goals real fast, while debt is the slow and steady approach to money for child’s education. Use child education plan as collateral for education loan. If you don’t have money for child’s education, you can pledge child plan and avail a loan against it.

4. Types of child plans:

·         Child endowment plan: This is a traditional life insurance plan which offers insurance cum investment. Sum assured is the guaranteed payment on death of the parent within the policy term or when child attains maturity. Periodic bonuses like guaranteed, revisionary or terminal bonuses enhance the payout at maturity.

·         Child ULIP:  Child ULIPs are offered by insurers to help save money for children’s education. A Child ULIP is just like any other ULIP. You invest money and purchase units of the fund.  You are allocated units, depending on the NAV of the fund. Part of the premium is used for mortality cover. Child ULIPs offer the triple advantage. You get life cover, the investment benefit and you can avail riders on paying a slightly higher premium.

·         Children’s money back plan: Children’s money back plan is a traditional money back policy which assures a child, good education even if parents are not around. You have participating plans were you get bonuses. Many children’s money back plans are non-linked, with-profit regular premium plans. Some plans have a limited premium payment option. Children’s money back plan offers life cover on the life of the child and not the parent or the guardian. The child’s life is insured under the plan.