Whether you believe that the world will be more like a sci-fi movie or just more of the same, you need to stay prepared financially. Children are especially vulnerable to the uncertainties of the future and the financial stress caused by such uncertainties.
The only solution is through life insurance and investment. While you are alive your investments will grow, but insurance will take care of your child’s goals if you cannot be there anymore. However, the best child plans will strive for a lot more than this.
Here are five unique features the best child plan has in India:
1. Appropriate Long-Term Investment Options
Just any investment option is not enough, your ideal investment plan for the child should offer appropriate long-term or short-term investment option. Every investment option or asset class has a specific risk-return profile. Based on this risk-return profile, each investment needs a specific time to offer the best.
Therefore, the ideal child plan will offer a long-term investment option or asset class, such as equity funds.
However, as you get closer to your goal, you will need safer investment options to park your accumulated funds. Thus, the child plan should also have a fixed income or debt fund option which you can utilise to keep your funds safe.
The best child plan can offer all these asset classes at the same time and allow you to create a suitable mix as per your time to goal.
2. Goal Protection Feature
We have already highlighted that insurance is a necessary part of a good child future plan. However, simple life insurance which gives a lump sum amount at the death of a parent is not enough. The insurance has to be for the goal, as the child will need to ultimately achieve the goal of higher education and become independent.
Goal protection the feature does exactly this. If this option is present in your child plan, your family not only receives the life cover amount at death, but the investment continues. The plan will mature at the intended time and pay the maturity value to the child.
The amazing the part is between the death claim and maturity, the insurer will deposit all remaining instalments, as you would’ve done. Thus, your child will receive the amount you intended her to receive at maturity, and nothing less.
3. Automatic Risk Management
When you are investing for long-term, i.e. 5 years or more, you have the opportunity to take a little more risk and get a higher growth rate. For example, you allocate a larger portion of your total investment to equity growth funds in the plan.
Higher equity allocation will mean higher volatility. Since you cannot spend a lot of time managing your investments, you need automated portfolio strategies to keep your portfolio abreast.
The best child plans will offer at least a few of these proven portfolio management strategies, such as:
Ø Systematic Transfer Option
Systematically transfers your lump-sum investment to equity fund(s), to provide rupee cost averaging.
Ø Automatic Fund Rebalancing
Automatically rebalances your portfolio between equity and debt based on market performance and your intended balance. For example, if you selected a ratio of 50:50 and due to good performance of the equity market it becomes 40:60 (debt : equity), the money will move from equity fund to debt fund until the balance is back to 50:50.
Ø Safety Switch Option
Gradually transfers all your funds from equity to debt in the last four years of your plan. This keeps your funds accumulated from equity safe as your plan matures.
4. Tax-Free Partial Withdrawal Option
Often, higher education goal is not a one-point destination, but a gradual climb with multiple milestones. The best child plan should address all these milestones and without increasing your headache in the process.
The best child plan will let you withdraw from the accumulated corpus without tax liability or affecting investment. You can make multiple partial withdrawals from such child plans and continue investing towards the next.
The child plan will also allow you to invest in both higher-education and marriage goal of your child at the same time.
5. Lower Management Expenses
You would think that an investment product with features like automatic portfolio management, life cover and goal protection would be an expensive affair. Fortunately, it’s the opposite. With plans like Invest 4G from Canara HSBC OBC Life, you can avail all these features with minimal recurring costs.
Invest 4G plan only levies a nominal fund management charge (maximum 1.35% p.a.) on the investment corpus. Other charges will include only mortality charge which you can choose to receive back from the insurer at maturity and goal protection premium.
Goal protection premium provides the additional cover to your child plan and helps fund the due investment premiums after your untimely demise. Mortality and goal protection premiums depend on your age and health, which you can check while starting your investment in the plan.
How to Make Your Child Plan Tax-Proof?
Child plan is a long-term investment, and the capital gains on this investment could be huge. Thus, tax efficiency becomes important in this case, and here’s a simple step to ensure that:
“Start with a sum assured more than 10 times of your annual premium”
For example, if you plan to start investing Rs. 1 lakh a year make sure you can have a life cover of more than Rs. 10 lakhs. This will help you keep your investment tax-free when you want to increase your investment in the plan in later years.
Child plans are life insurance plans. Payments from life insurance plans remain tax-free so far the annual premium into the plan does not exceed 10% of the life cover. It is likely that you will want to invest more into the plan a few years down the line. Thus, the additional life cover.
Thus, using the best child plan will help you not only invest in your child’s future but also safeguard the goal with maximum tax-efficiency.
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