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When To Start Investing In A Savings Plan For Your Child?

dateKnowledge Centre Team dateJanuary 12, 2021 views190 Views
When To Start Investing In A Savings Plan For Your Child?

Preparing for the future of children is always one of the top priorities of every parent. It mainly includes investing in a child's future education and studies. By planning these things early, one can ensure that their children do not face a financial crunch while funding their dreams.

One essential thing to never forget while considering child insurance plans for the future is that you should not lay aside your investment plans for retirement. It is to ensure that you don't end up being dependent on your children during retirement years. You may even consider educational loans or self-funding by your children as a last-minute plan.

Without wasting any more time, here's a fully-detailed guide on how and when to start investing in a savings plan for your child:

1. Decide the time horizon of your investment

One of the essential things to factor in while planning for future investments is the length of time you want to continue making the investment. Generally, the longer the time horizon, the greater benefits one can enjoy. You could also figure out how long it will take for your child's graduation and post-graduation. Accordingly, you can start investing in a child plan.

2. Estimate the cost of education

The second thing you need to determine is the average cost of your child's future education. Post-graduation generally costs higher than graduation, but it may vary from institution to institution. Another factor to consider is if you want your child to have global exposure in education or stay close to home. Here, you could even take into account your child's graduation in your own country and post-graduation in another country.

Here's a small example to help you understand the importance of both the given points.

Your child's current age 3 years (suppose)
Cost of education in today's terms Rs. 5 lakhs
Time left for graduation 15 years
Inflation rate 10% per annum
Cost gathered at the time of graduation Rs. 20.88 lakhs
The amount you need to invest per month Rs. 4,180

Hence, by planning and investing early, you can earn a significant sum of returns in a longer time horizon.

3. Assess your current assets and liabilities

Before making plans for the future, you should know where you stand presently. Properly analyze your assets and liabilities and then make a decision. If you're investing a part of your savings in a child plan, you should be very clear about its present value. Knowing the current value ensures that you get protected from dipping in the investments made for other financial goals like your retirement. Do not dive into the child plan investments for other low priority expenses like house renovation, etc.

4. Put aside some amount to save

After analyzing the average cost of education, you should decide on how much amount you should save. Plan accordingly on how to reach the desired goal on time. You should try to protect a larger portion of your current monthly income if your savings seem insufficient. It can be challenging in many cases. Try reducing unnecessary expenses. You can always find another side source of income. But, you have to keep in mind that your savings alone will not make your future secure. Savings will not help you to reach the targets since inflammation rates can erode their value.

5. Get yourself insured

It is important to get insured in time in case the future has surprises for you. Untimely death is one problem that most families face. It hurts the financial system, especially if the sole earner of the family dies. Insurance is the key to achieve future family goals in your absence. By having an appropriate life and health insurance, you can ensure the coverage of the school and tuition fees of your child.

6. Always prepare for the unexpected

Apart from getting insured, it is always beneficial to prepare for anything unexpected. It may include additional expenses like the cost of accommodation, pocket money, and so on. When your child enters high school, there are many other unexpected payments apart from school and tuition fees. These amounts may look small at that time but may cost you more in the longer run. It is even more relevant if your child decides to do graduation or post-graduation overseas. But this is not impossible to manage. Take some time speaking to other experienced individuals. It will help you get an estimate of the potential expenditures.

Investment Strategies For Your Child’s Future Plan

After you've decided when to start investing for your child, the next step is to find the most suitable investment plan for you. It will help you analyze the amount to save and assess how much you can afford after keeping aside regular savings.

Here are a few investment strategies worth checking out:

• Systematic Investment Plans:

Investing in Systematic Investment Plans (SIP) has many advantages. It allows you to invest your money in a structured manner. For goals like your child's future education, investing in equity funds through SIP for a longer tenure is what you can consider. Also, we see that generally, the returns from equity funds are more likely to beat the inflammation rates of 5-6% every year, with a good compounding power. Furthermore, by investing a small amount monthly, you can ingrain a habit of regular savings in you.

• Debt Funds:

When compared to equity funds, debt funds are less riskier. The funds usually get invested in numerous deposits or bonds, and the interest is finally earned by lending the funds and investing. Investments in debt funds are preferable for the recurring expenses of a child, like school fees. It is because debt funds are very flexible when it comes to liquidity. It means that you can easily withdraw your funds anytime you want. It will also deliver returns up to 5-7% annually.

• Public Provident Fund:

The Public Provident Fund is made only to invest in funds with a provisionary exemption. It is one of the best investment plans for the future education of your child. The main feature of this kind of investment includes an allowance of tax deduction, and no tax is imposed on the accumulation of returns either. The PPF investment comes with a tenure of a minimum of 15 years. Hence, it is most suitable for higher education or marriage plans for your children. However, you must start investing in the early stages to build a large corpus over time.

• Sukanya Samriddhi Scheme:

The government introduced the SSS Yojana to encourage parents to save money for the girl child. You can opt for this scheme anytime for a girl between her birth till she becomes ten years old. This scheme also comes with a tax exemption feature. The maturity period for the Sukanya Samriddhi Scheme is 21 years. Therefore, you must invest as early as possible if you want to reap the benefits of this scheme. The current rate of interest is 7.6%, which is subject to change. Further, you can also make small withdrawals after your girl turns 18 years of age.

• Term Insurance Cover:

Term insurance plans are also one of the best child plans to consider. A pure term insurance plan covers the needs of your child in case of an unexpected event. If something happens to the sole bread earner, it will cover the financial blow. If you are opting for a term insurance cover, you should always have coverage that includes all the major expenses like education, livelihood, marriage, etc., for your child.

If you have invested in an equity fund, you should move the corpus to a debt fund when you start approaching your financial objective to lower the chances of risk.

However, if you have less time to invest in a child plan, opt for a 50-50 investment strategy between debt and equity instruments. Through this method, even if you incur some losses from your equity investments, the debt investments will balance your total loss.

It is also essential to ingrain good saving habits in your children from an early age. Teaching them the importance of financial planning and involving them in the process is highly recommended. When you're building a child plan, remember to take care of the involved risks, features, and terms and conditions of your investment before applying for the investment.

With Canara HSBC Oriental Bank of Commerce Life Insurance Company, you can invest smartly with our junior plans. Our smart junior plan includes perks like guaranteed annual payouts, flexible policy term options, and limited premium payments. Start early with us to yield more returns for the future of your child!

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Frequently Asked Questions (FAQs) for Term Insurance

This being a term plan doesn't offer any payout after maturity or expiration date.

Each insurance company has its own term insurance premium calculator. If you want to check out the premium quote, go for the iSelect Star term plan calculator. It gives a premium amount based on your age, gender, habits, education, and annual income.

You can purchase an iSelect Star term plan anytime between 18 to 70 years of age.

It depends on your needs. For example, if you want to cover a child's education or wedding expenses, you have to include them in your coverage. Your premium will be calculated accordingly.

If your key purpose is to give your Family financial protection, go for the term insurance plan. And if you want some savings, in the end, go for a traditional life insurance plan.

Go for at least 12 times cover than your annual income. Or you can go as far as 20 times coverage as per your needs.

The right time is when you don't have anything to keep your Family safe from financial storms, and they rely on you for financial needs.

If you are unable to make the payment or suffering from a terminal illness, a term plan pays a part of the sum insured to treat your disease.

Term insurance riders are attachment or endorsements made, while taking the term insurance policy, as a supplementary coverage to policyholders. Apart from the core death benefit, term insurance riders offer below-given additional benefits:

  • Accidental Death Rider When a person suffers from a terminal illness, his/her family ends up spending a significant amount in treatment and medical expenses. Accelerated death rider pays a part of the sum insured in advance to cover such costs and save the family from running out of cash.
  • Accidental Disability Rider If the policyholder can't pay the premium because of an accident or permanent disability, a sudden disability this pays the premium on behalf of the policyholder till completion of policy term or for a defined duration.
  • Critical Illness Rider If the insured person gets a heart attack, cancer, or any other critical illness, this rider pays a lump sum on valid diagnosis.
  • Premium Waiver Rider If the policyholder is unable to make payments due to income loss or disability, a premium waiver rider waives off all future premium payments. And the term policy remains active until the expiration date.
  • Income Rider: The rider ensures that your family receives regular income + sum insured in case of unfortunate demise of life insured.

Anyone can go for life insurance as it offers some savings after the maturity date, but it doesn't cover the protection of your family . The best term insurance plan is solely designed for taking care of loved ones if something happens to you. Term plans act as a shield between your family and sudden financial fall. They make sure that your family lives a healthy life even after you. With a little amount paid per year, you can be worry-free from the family's financial conditions.

Questions that you need to ask while buying Term Insurance?

  1. 1. Amount of premium you have to pay based on your age, habits, education, and monthly income
  2. 2. The total number of benefits covered in the term plan. Do they include benefits that you care about the most?
  3. 3. How to save money on tax if you pay for the term plan?
  4. 4. Do they offer regular income options?
  5. 5. Can you change the coverage and premium in the future?
  6. 6. Does the claim consider valid if death occurs outside India?
  7. 7. Which kind of death is not covered by insurance?
  8. 8. Can NRIs take term insurance? If yes, what are the conditions?
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