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Should young couples invest in child insurance?

April 30, 2019 10:30 IST

There is no reason for a child with no dependents to have insurance because insurance is put in place to provide for the child in the event of a parent’s untimely death and not the other way around, says Amar Pandit.

Should young couples invest in child insurance?

Photograph*: Kind courtesy Baby Chakra

A lot of young parents have been taking insurance in the name of their children.

The primary reason for doing so is because parents want to offer a better quality of life, better opportunities and secure the futures for their children.

But how many of you have really thought through before making a conscious financial decision?

In the desire to provide the best of life for their children, young working couples end up falling prey to the emotional ploy taken by insurance companies to sell their plans and invest heavily in 'Children's Plans'.

You must realise that a child insurance plan is a very inefficient way of saving money for your child's future.

In fact, setting aside money for your child’s goals like education, marriage can easily be achieved by investing in Mutual Funds or any other investment avenues.

Before investing in children’s insurance plans, take a minute and think.

Do children actually need insurance?

There is no reason for a child with no dependents to have insurance because insurance is put in place to provide for the child in the event of a parent’s untimely death and not the other way around.

Aggressive marketing of specific plans for children is one of the main problems here.

There is no better marketing ploy than striking an emotional chord, compelling parents to do something for their children and their future.

People are made to believe that any product that is labeled as 'Children's Plan' is the best option for getting an insurance cover for one's child.

In believing so, they miss out on the opportunity to build a sizeable corpus focused purely on achieving their children's goals.

What exactly are children's insurance plans?

These are basically investment-oriented insurance plans.

Most child specific insurance plans provide a cover for the parents with the proceeds of the policy going to the child (or appointee in case of a minor), in case of the untimely death of the parent.

There are some plans that provide life cover for children. 

Endowment

This traditional form of insurance merges saving with some sort of protection.

Most of these products give a year-end bonus that adds to the corpus and is received at maturity.

However, this bonus is only paid on the sum assured and not on the compounded returns. 

Money back

Instead of paying back the entire amount when maturity is reached, these policies give back to the policyholder's small amount of money at different points in time.

Twenty per cent of the sum assured is given after the first four years, another 20 per cent after the next four years and so on.

On maturity, the last 20 per cent, along with the accumulated bonuses is paid.

Riders like critical illness, personal accident, term and waiver premium are included in most policies. 

ULIPs

A Unit Link Insurance Plan is an amalgamation of insurance and mutual funds.

Within this type, you receive units and a part of the premium is used to account for an insurance cover.

The rest gets invested like a mutual fund. However, the charges for ULIPs are very high.

What is the best choice to make? 

While ULIPs are extensively marketed when it comes to insurance for children, when it comes to equity investments, preference should always be given to the diversified equity funds over ULIPs.

ULIPs not only offer less flexibility in terms of investment options and switching midway, but also have very high inbuilt costs, especially in the initial years.

That is why your overall wealth building will be lesser as compared to any pure investment options. 

The debt space provides better options. PPF (Public Provident Fund) and EPF (Employees' Provident Fund) provide good investment opportunities.

Endowment and money back policies are best avoided by both, children and adults alike.

The reason for this is its obscure nature and 4 to 6 per cent returns. 

Thus, as parents, the most important thing is to plan for your children's goals and start investing towards them in a consistent manner.

This will help you realise the bright future you envision for him/her and safeguard your family’s financial future.

Keep your investment and insurance decisions separate and do not fall for child-specific plans ploy.

Opt for pure insurance products like term plans, so that the risks are covered.

Invest in avenues like mutual funds to build a corpus for the future.

It’s always a good decision to talk to professionals like certified financial planners to help structure and plan for your financial goals.

*Image published for representational purposes only.
Amar Pandit, CFA, is the founder of HappynessFactory, a fintech company.

AMAR PANDIT