Investing in your child's education is one of the most crucial decisions of your life. But in the last decade, education costs have been steadily rising. The inflation in the education sector shot up to 4% in 2022. Plus, with high overall inflation across the globe, the education sector is on course to become significantly more expensive in the coming years.
With the rising cost of education, you need to plan to ensure that financial constraints do not hinder your child’s future. A child education plan, often offered by insurance companies, can provide a structured approach to saving for your child's future academic endeavors. However, before committing to such a plan, there are several essential questions to ponder.
Here are a few questions you should aim to address before committing to a child education plan.
1. How Much Can I Realistically Save for My Child’s Future?
Before getting into any investment plan, it's vital for you to establish your clear financial objectives. Determine the amount you aim to accumulate for your child's education, factoring in tuition fees, living expenses, and other associated costs. Also, remember that setting realistic goals will guide you in selecting an appropriate child education plan. Ensure that your plan can completely cover your child’s future goals.
2. What Type of Plan Suits My Needs?
Child education plans come in various forms, including Unit Linked Insurance Plans (ULIPs), traditional insurance policies, and mutual funds tailored for education savings. ULIPs are a popular choice among parents because they provide both investments and insurance coverage. You can also make use of an online ULIP calculator to get an estimation of your possible returns at various growth rates. This can help you choose a plan that provides the best return on your investment.
3. What is Plan Tenure?
The duration of your child's education plan should be aligned with your child's educational timeline! A longer tenure allows for systematic wealth accumulation and potentially higher returns. Try to align your plan's maturity date with the anticipated start date of your child's higher education. For example, if your child is 5 years old now, they'll likely enter college in about 12–13 years. Therefore, choose a child education plan that matures in at least 10 years.
4. How Can I Measure the Education Cost Accurately?
It can be difficult to accurately predict a child’s future career path based on their current likes and dislikes. However, you can still prepare to give them the best education possible, irrespective of their future choices. It is essential to factor in the annual inflation rates related to education costs.
5. What are the Associated Charges of the Education Plan?
Scrutinize the fine print to understand the fees and charges associated with the child education plan. These may include premium allocation charges, fund management fees, and policy administration charges. Be mindful of any hidden costs that could impact the overall returns on your investment.
6. What is the Flexibility of the Plan?
Life is unpredictable, and financial circumstances may change over time. Ensure that the child education plan provides flexibility in terms of premium payment options, partial withdrawal options, and the ability to alter investment funds. Flexibility allows you to adapt the plan according to your evolving needs and market conditions.
7. What is the Plan’s Risk Profile?
Evaluate the risk-reward ratio of the investment options within a child education plan. ULIPs typically offer a range of funds with varying levels of risk. The main types of ULIP funds include equity (high risk, high reward), debt (low risk, slower growth), and balanced funds (a balance of equity and debt funds). Additionally, you have the option to switch between any of these funds based on their performance and your risk tolerance without incurring any additional charges. This allows you to realign your portfolio as and when needed.
8. Does the Plan Offer Additional Benefits?
Beyond savings for education, explore any additional benefits provided by the child education plan. These may include life insurance coverage, premium waiver in the event of death or disability, and tax breaks under applicable parts of the Income Tax Act. Check if there are any bonuses included in your plan.
9. Do I Need to Regularly Review and Adjust the Plan?
Financial planning is a continuous process that necessitates regular assessment and adjustment. You should regularly assess your plan’s status, irrespective of whether it is a guaranteed plan, ULIP, mutual fund etc. Monitoring the performance of the child education plan will help you make necessary tweaks to maximise your returns. Stay proactive with your investment to ensure that factors like market conditions, personal issues etc. don’t get in the way of your child’s education goals.
Starting early is paramount when it comes to investing in a child's education plan. The significance lies in harnessing the power of compounding, where returns generate further returns over time. By initiating the plan sooner rather than later, parents can capitalize on the extended investment period, allowing their funds to grow exponentially. Even modest contributions made early on can accumulate substantial wealth by the time their child reaches the age of higher education.
Ask the crucial questions and conduct extensive research to make an informed decision that is best for your child’s future. Ultimately, your choice rests on your risk tolerance, be it an endowment plan or a ULIP. It's generally recommended to start saving early so that you can lay down a solid foundation for your child’s career. Remember, investing in education is investing in the future.
How are we calculating this? What’s the source?