For parents when it comes about their child there are no compromises, particularly in education costs. We all know that the sooner we start saving and also investing towards this goal, the more we are able to gain. But let me tell you, don’t make the mistake of choosing a traditional child plan by insurance providers or even a unit linked insurance plan or ULIP to do this.
Have you ever wondered, why is this a mistake? Well you can thank the high costs attached. So, what can be the alternatives? Basically, combining mutual fund products with a basic term insurance plan s going to be more remunerative and cost effective. Here is what you need to know presented by MoneyMindz.com, First Free Online Financial Advisors.
Why ULIP doesn’t work?
Let me tell you that the marketing of ULIPs, especially child plans, tugs at your heart strings with little connect to actual gains. The reality is you will end up paying too much for little benefit. When investment is linked to insurance, additional costs like mortality, premium allocation, policy administration and so on get added with the cost of fund management. The fact is that the newer versions of ULIPs return mortality charges at maturity if no death benefit has been claimed, but other charges remain imbedded. So, while a return of charges sounds good, deducting them at the time of investment brings down the potential return.
A true fact, “Numbers don’t lie”
Let us have a look at the numbers. For example, if you are 30 years and planning for your daughter’s higher education cost as soon as she is born. We can assume that you go for the all enticing ULIP. Generally the recommended plan will be one that offers a premium waiver on death (policy continues as it is) and return of mortality charges at maturity (where no death benefit is claimed). Let’s say, for a Rs 5,000 monthly premium, 18-year policy term or maturity, you will get a sum assured of Rs 6,00,000 on death.
So, basically the expected fund value at maturity calculated at 8% per annum is around Rs 19.5 lakhs as per the online calculator on a leading life insurer’s website. Therefore, you have the choice of various fund options – equity, debt or hybrid and switches between them.
Let’s assume, if instead you invest Rs 5,000 per annum in a mutual fund SIP with the expected 8% per annum return, your total return amount at the end of 18 years is likely to be around Rs 24 lakhs. So, adding to that a term life insurance policy of Rs 1 crore sum assured which comes at an annual premium of around Rs 7,700 (Rs 138600 for 18 years); your net return is around Rs 22.6 lakh.
You will get to see that the return numbers for traditional non ULIP child plans are even worse. As a result if you want to secure your child’s future, look beyond the soft advertising around child plans. The best course of action will be to keep investment and insurance separate; this is the best way to maximise return and minimise cost in the long run.
For more information visit: www.moneymindz.com or give a missed call to 022-62116588 and download our FinFree app.