Do’s and Don’ts while planning for Children’s future

When it comes to children’s future, no one is in any mood to make any compromise. Every parent wants the best for his/her children. Planning for children’s education (and perhaps marriage) is every parent’s top priority.  In this post, I will discuss some of the do’s and don’ts while planning for your children’s future.

Let’s start with Don’ts

Don’t #1 Purchase Insurance on the life of child

This is one of the most stupid things you can do. First of all, the life insurance cover has to be on the life of the earning member.  Your child is not an earning member.  If you purchase a life cover on your child’s life and something happens to you, there will be no payout from the insurance company.

Of course, they don’t buy term life cover on the life of their children. They either purchase traditional life insurance plans or unit-linked insurance plans. Now, these are insurance and investment combo products. And you are not really banking on the insurance cover in this case. You are in this plan only for the investment returns. There are many other investment avenues to get better returns.

Read: Stay away from Jeevan Anand

Don’t #2 Purchase a Child insurance plan

Even though the name may suggest that you are buying insurance on the life of the child, these plans are different. These plans provide the dual benefit of insurance and investment.  The life cover is on your life (and not your child’s). So, this approach is not as stupid as the previous one was.

These plans can be structured in many ways. Typically, in the event of the death of the policyholder, the nominee gets the Sum Assured and all the future premium installments are waived off. The insurance company pays the premium in your absence. Your child gets the accumulated wealth at the time of maturity. Waiver of premium in the event of the demise of the parent is a common feature in these plans.

On the face of it, it looks like a good plan. Your child gets Sum Assured in the event of the death of the policyholder and all future premiums are waived off.  Your child still gets money at maturity which can be used to finance his/her education. With these insurance plans, it is easier to maintain investment discipline.

These plans make for an excellent sales pitch.  The appeal is to your emotions and how much you love your children. Very difficult to say No. However, when it comes to financial decisions, you better keep your emotions out.

If you have good investment discipline, you can create a better structure with mutual funds (and other pure investment products such as PPF) and a term insurance plan.  Go through the following post to find out how.

Read: Should you purchase Unit Linked Child Insurance plans?

At the end of it, child insurance plans are traditional life insurance plans or ULIPs only. So, the issues with regular ULIPs and traditional insurance plans apply to child plans too.

Read: ULIPs Vs Term Plan + Mutual Funds

A word about term insurance. If you think your family can not handle a lump sum payout of a regular term plan, opt for an Income Replacement Term Insurance Plan.

Look for the following keywords in the insurance plans:  Young, Star, Udaan, Champion, Smart Kid, Shiksha, Scholar etc. If your insurance plan has any of the aforementioned keywords, you are most likely purchasing a child plan.

Moving to Do’s

Do #1 Get the goal amounts right

I need Rs 20 lacs for my daughter’s education in 15 years. Don’t get fixated with random numbers. Put some thought behind how much you need for goals such as education and marriage. For instance, if the cost of desired education is Rs 10 lacs at the moment, account for inflation while figuring out the cost of education in 15 years. Assuming specific inflation in education at 10%, the cost will be Rs 41.7 lacs. If you were planning for only Rs 20 lacs, you will find yourself in serious trouble.

If you board a train that goes to New Delhi, you can’t expect to reach Mumbai. You have got to set the right targets.

Of course, you don’t know beforehand what your daughter will want to study. She may go for medical, engineering, management, arts or science.  The cost of education will vary based upon what she studies and where she studies. If you plan to send your daughter abroad for education, the expenses will be much higher. There will be ancillary expenses for travel too. You need to consider all the costs and plan accordingly.

Similarly, you don’t how much inflation is going to be. Make conservative estimates. Take inflation at 10% instead of 8%. It is better to err on the higher side when you are estimating costs for financial goals.

So, even though there are uncertainties, it does not mean you don’t plan well.

Do #2 Start saving early

You don’t have to wait until your child starts exploring study options. Be proactive and start investing early. Make a rational assessment of your kid’s education expenses and start saving early.

The sooner you start the lesser amount you need to invest per month. For instance, your daughter is two years old.  You think you will need Rs 1 crore for her education when she turns 20. If you start today, you will need to invest Rs 16,651 per month (at 10% per annum). However, if you delay by 5 years, you will need to invest Rs 31, 451 per month. Almost double the amount if you delay by only 5 years.

So, get the goal amount right and start saving early.

Do #3 Include children in your health insurance plan

Include your children in your health insurance plan soon after their birth.  Typically, a newborn can be included in the policy after 90 days. So, do that as soon as possible. Just like you don’t want compromise on their education, you can’t compromise on their health either. Without proper health insurance, you may be forced to dip into your investments for other goals.

Do #4 Education is a MILLION times more important than marriage

This is a strong personal opinion. And we can disagree.

I agree both are important. However, from the perspective of financial planning, while the education of the child cannot be compromised, you can have a slightly less expensive wedding.

Unfortunately, it works the other way round. A lot has to do with our society and culture. Some of the common observations are:

1. I need Rs 30 lacs for daughter’s education and Rs 60 lacs for marriage. Of course, marriage happens a few years after education and you can expect inflation to increase the cost of marriage. However, most people are fixated with numbers and are not even thinking about inflation when they talk to me first. They actually feel they need to save more for daughter’s marriage than her education.
2. I need Rs 20 lacs for son’s wedding and Rs 60 lacs for daughter’s wedding. Do I need to say anything?

This mindset needs to change.

Education should be your top priority. If you take care of education, marriage should be automatically taken care of.

Do #5 Don’t compromise your retirement while saving for your children’s education

Be practical. Every parent wants the best for their children.  You do not want to make any compromises. There is nothing wrong with the approach. However, do not overdo it.

As discussed before, there are many variables and assumptions in estimating the costs of education and marriage for your children. Assumptions can go wrong. Inflation may be higher than expected. Returns can be lower than expected.  You may have planned or education in India but your daughter wants to go abroad for studies. Certain medical exigencies may have forced you to dip into savings.

So, it is quite possible that you are falling short of the required corpus for your children’s education. Don’t dip into your retirement corpus to bridge the shortfall straightaway. Explain the situation to your kids. They may come up with alternatives.  They may be able to take education loans and repay the loan when they start earning.

The earning ability is severely compromised during retirement. And retirements can be long. You cannot make too many compromises with your retirement planning. I am not saying you cannot rely on your kids’ support in your golden years. However, it is prudent not to depend too much on them.

Do #6 You have got to stop somewhere

It is your duty to finance your children’s education. And marriage to some extent. However, please don’t plan to purchase houses and cars for them.  Let them manage house and car themselves.

If you have excess money, then there is nothing wrong. You can always lend a helping hand. However, don’t make them too dependent on you. Don’t withdraw your PPF balance to purchase a house for them. You have got to stop somewhere.

If you feel I have missed out on an important aspect of planning for a child’s future, do leave your observation in the comments section.

Do note a number of the above points may not hold true if you have a child with special needs.