4 ways to financially secure your child’s future

Children’s Day brings with it the reminder to safeguard the future of your child. From opening a simple savings account for teaching children good money habits, to investing in products tailored for children, options are aplenty. Here’s a lowdown on what’s on offer:

Savings account and cards

Minors above the age of 10 years are allowed to open and operate savings bank accounts (SB A/Cs) independently. For those below 10 years of age, the account can only be operated jointly with a parent or guardian.

These accounts come with minimal or no minimum balance requirement. They work like any regular SB A/C (without an overdraft facility) but with a cap on transaction limits. Passbook, cheque book and, of course, internet banking facility come along with the SB A/C.

Most banks also provide customised debit cards, for those above ten years of age, with certain daily withdrawal limits (mostly about ₹5,000).

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Instead of giving children money whenever they ask for it, parents must part with a specific amount periodically and ask them to manage their expenses within what is available. Giving money through a banking channel leaves a trail and helps parents monitor whether the money is being spent judiciously. Periodical personalised account statement makes the child aware of his spending habits.

To woo customers, banks offer many frills besides basic SB A/C facilities.

For instance, HDFC Bank’s Kids Advantage Account features a free education insurance cover of ₹1 lakh in the unfortunate event of death of parent/guardian while Axis Bank’s Future Stars Savings Account offers personal accident insurance of ₹2 lakh for child.

Kotak Mahindra’s My Junior Account offers discounts across shopping, dining, and on education courses.

Upon the child attaining 18 years, the minor SB A/C will be converted into a regular SB A/C after some paperwork. Once the child crosses 18 years of age, if you or your spouse have a credit card, an add-on or supplementary credit card can be given to your child. This can come in handy, especially when the child moves out to live independently in another city or country for higher studies.

An add-on card usually shares the credit limit of the primary card-holder. It is also possible to fix a lower limit. Banks such as Kotak Mahindra and ICICI Bank provide these add-on cards free of cost.

At the end of the day, the parent is the one who has to pay the bills, which helps in keeping tabs on the spends made by the child. Each time the add-on credit card is used, the parent gets an SMS alert.

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Deposits and mutual funds

While SB A/Cs and credit cards help meet regular expenses, children do receive lump sum gifts from parents, grandparents and close relatives during festivals or on personal achievements. Options to encourage children to save and multiply these sums are available.

Most SB A/Cs come with auto-sweep facility, which moves excess money from the savings account into a fixed deposit (FD). The threshold limit above which money will be swept from the savings account into FD varies from bank to bank.

For example, in the case of SBI’s Pehla Kadam (for below 10 years of age) and Pehli Udaan (for those above 10 years), the minimum threshold for auto sweep facility is ₹20,000. In case of HDFC Bank, if the balance in a Kids Advantage Account reaches ₹35,000 or more, the amount above ₹25,000 will be transferred to an FD of 1 year and 1 day in the child’s name.

Besides the autosweep option to get maximum bang for the buck, a normal FD or an RD (recurring deposit) can also be opened by a minor of any age, through his/her natural or legally appointed guardian. The guardian remains in charge of the deposit until the child turns 18.

Also, banks such as Kotak Mahindra Bank allow investments into mutual fund SIPs from the savings account, which can be continued till the minor attains the age of 18. Subsequently, to let the investments flow, both the bank account and the investment account status have to be updated from minor to major. Parents can guide children in the selection of funds. A fund that is a good choice to secure your child’s future is recommended in our Fund Insight page today.

Using these add-on facilities provided by banks will not only help teach children the habit of saving but also the habit of investment.

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Post-office savings schemes

Small savings schemes usually offer interest rates that are better than most bank products and can be a good choice for your children. The sovereign guarantee offered also make them a very safe choice. Minor children who are above 10 can, by themselves, open most savings schemes with the post office, such as Post Office Savings Account, Recurring Deposit, Time Deposit, Monthly Income Account and National Savings Certificate.

Besides, parents/guardian can also make investments on behalf of the minor in these schemes. Apart from the above, Public Provident Fund (PPF) account can be opened by the guardian on behalf of the child. The maximum limit of ₹1.50 lakh for investment in PPF will include deposits made in his/her own account and in the account opened on behalf of a minor.

The Sukanya Samriddhi Account, available specifically for a girl child, can be opened by a parent or guardian for a girl child who is less than 10 years of age. This account can be opened for maximum two girls in a family.

The parent/guardian has to invest at least ₹1,000 every financial year, up to a maximum of ₹1.5 lakh for each girl child. Contributions have to be made for maximum of 15 years from the date of account opening, and the account will mature on completion of 21 years from the date of opening. Interest will accrue in the account every year till maturity. This scheme also enjoys EEE (Exempt-Exempt-Exempt) taxation, meaning that the initial investment, interest earned and the withdrawal all have tax benefits. This tax treatment is similar to the PPF.

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Insurance-cum-investment plans

Child insurance plans are investment-cum-insurance products and predominantly fall under the category of moneyback policies. Under child policies, either a lump sum is paid on maturity (usually, at the age of 25) or payouts are made as a percentage of sum insured every time the child reaches a certain age.

For example, in SBI Smart Champ, the policy term is a maximum of 21 years with a premium payment term of 18 years. The survival benefits will be paid at the end of 18th, 19th, 20th and 21st year of the child; with each pay-out equivalent to 25 per cent of basic sum assured plus 25 per cent of accrued bonus.

On maturity (at the age of 21), terminal bonus as applicable will also be paid.

Most child plans come with inbuilt ‘waiver of premium’ rider in the unfortunate event of death of the parent who is paying the premium.

In case of the death of the parent, the sum insured will be paid to the family and there will be no requirement to pay future premiums. The policy continues to accrue bonuses, and the child gets to receive the survival benefit and/or the maturity benefit as per the policy features.

Some child plans also come in the form of ULIPs (Unit Linked Insurance Policies). In this option, the choice of the fund is up to the policyholder and the maturity benefit would be market value of the fund as on that date. If you are going in for a ULIP product for better returns, look at the past performance of ULIP funds and associated costs. This will give you a better understanding of the maturity benefits you get.

Popular child policies from LIC come in a slightly different package. LIC New Money Back and LIC Jeevan Tarun are also moneyback policies but the difference is that the insurance part of the LIC policy covers the life of the child and not the parent. Also, the ‘waiver of premium’ rider is not in built for the policy and has to be purchased separately.

In terms of taxation, the premiums paid are eligible for Sec 80C deduction of ₹1.5 lakh subject to conditions. Also, the maturity and/or the survival benefit is exempt from IT Act under Section 10(10D). In case of ULIPs, the tax rules are not the same.

The tax exemption under section 10(10D) will be available only for maturity proceeds of the ULIP having annual premium up to ₹2.5 lakh. Otherwise, the maturity amount shall be treated as capital gain and will be taxed accordingly under section 112A.

Just like other insurance plans, the earlier the policy is bought, the more competitive is the premium.

Of course, based on your needs, return expectations and risk profile, you need to assess what will suit you best — a child-focused insurance-cum-investment plan or separating investments from insurance, by buying a pure term cover to provide for your dependents and making investments in other avenues to provide for your child’s future.

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