How to Choose the Right Child Plan: Factors to Consider

Deciding on the right child plan to secure your child's future is one of the most important financial decisions you will make as a parent. With so many plans promising attractive returns today, how do you choose the one best suited for your child? This comprehensive guide covers all the key factors you must consider when selecting a child plan.

Top Factors to Consider

This section covers the top factors to consider when choosing the right child plan.

1. Define Your Goals

The first step is clearly defining what you wish to achieve from the child's plan. Do you want to build a corpus for higher education? Or are you looking to save for other milestones like a wedding, house deposit, or a protective cover? Outlining these goals will help you narrow down plans that meet your needs.

2. Investment Horizon

Evaluate the number of years you are willing to invest. Longer investment horizons of 10-20 years can generate inflation-beating returns through equity funds. For medium terms of 5-10 years, balanced funds are ideal. Debt funds can be the safest bet for short horizons under five years. Your investment horizon should match the lock-in period and maturity term of plans you zero in on.

3. Risk Appetite

Ascertain your willingness and ability to bear market volatility. If you are risk-averse, traditional child plans offering guaranteed returns would be suitable. For moderately aggressive sentiment, ULIP child plans that invest in equity funds could help you optimise returns. Analyse your loss-bearing capacity before exposing yourself to equities.

4. Premium Payment Term

Child plans allow customisable premium payment terms that could range from single, one-time payments, 5 payments, 10 payments, or regular payments until maturity. You should opt for the term you are most comfortable committing to diligently.

Single premium plans allow lump sum investments, relieving you from yearly payments. But regular premiums, despite being disciplined, can help you average out the per-unit acquisition cost.

5. Returns on Investment

The projected returns on your selected child plan should align with your expected corpus. Study historical returns across top child plans to identify the options that offer the best yields. While past returns don’t guarantee future earnings, they can serve as reasonable historical performance indicators.

6. Insurance Coverage

In case of the untimely death of a parent, sufficient life cover can ensure that your child’s educational needs are taken care of. Opt for child plans that come bundled with life insurance. This can help you secure your child’s future more comprehensively. Ensure the insurance amount and coverage tenure adequately cover the projected expenses.

7. Liquidity

Thoroughly analyse the conditions of withdrawal. Some child plans may restrict access to accumulated funds until maturity. Others may allow partial withdrawals to meet educational needs. Understand lock-in clauses and liquidity timelines before purchasing the plan.

8. Tax Benefits

Opt for tax-saving child plans that offer tax deductions up to INR 1.5 lakhs under Section 80C. This tax break on premiums paid lets you save tax yearly, adding to the investible surplus. Many insurers also offer policies where maturity proceeds are tax-free under Section 10(10D).

9. Fund Performance

For market-linked child plans, evaluate the historical returns of the funds you wish to allocate. Consider choosing plans that allow switches between funds to optimise returns in line with market movements. Remember to analyse the fund’s portfolio holdings and risk metrics.

10. Charges

Compare the total costs across different child plans. You could consider charges like premium allocation charges, policy administration charges, mortality charges, fund management fees, and more. Lower charges can ensure higher maturity values. Notably, transparent fee structures indicate efficiency.

11. Claim Settlement Ratio

A vital but often overlooked aspect is the insurer’s claim settlement history. Opt for companies with the highest settlement ratios across insurance plans. Efficient and fair claim processes should inspire confidence.

Final Tip

Identifying the right child plan is vital in securing your child’s future. Analyse the above parameters across shortlisted options before purchasing a plan that aligns with your financial situation, risk appetite and goals. Research child insurance plans diligently and invest wisely.