Buying a child plan is more of an emotional decision than a financial one. However, it may not be worth it, given the low cover and low return they offer.
Insurance policies for children are a high emotional appeal product. No one would like to say no when it comes to investing for children. But are these policies the best way you can provide for your child’s financial security? Let us find out.
What are the types of child policies available?
Most of the child insurance policies are packaged as solutions for providing for education and marriage of your child.
At a broad level, these policies can be divided into traditional and unit linked policies (ULIPs). Within traditional policies, you have policies which pay a lumpsum at maturity, these are called endowment policies. Moneyback policies pay a fixed percentage of the sum assured at fixed intervals and the bonuses are paid at maturity. There are variations of these policies which pay at specific milestones of the child’s life. In traditional policies the returns come in the form of bonuses and loyalty additions declared by the insurer.
The unit linked insurance plans (ULIPs) are market linked policies. In ULIPs you get to choose how your premiums are invested. There are various combinations of equity and debt to choose from. If you want a stable option, you would want to look at the option with high debt instruments; on the other hand, if you are willing to accept risk (volatility) you will look for more equity in the investment. Your returns will depend on how the underlying investment mix performs.
These policies either cover the life of the child or the parent. Usually the policies that cover the life of the parent come with some specific riders like premium waiver rider. This rider waives off the future premiums of the policy in case of death of the parent insured. The benefits or maturity of the policy accrues to the child as pre-defined in the policy.
What a child needs in terms of financial security:
With respect to protection for children there are three things that need to be covered:
1. Provisioning of income for daily needs in absence of parents income
2. Provisioning for major life goals like education and marriage
3. Appropriate health cover
Looking at the above requirements, it is the earning parent who needs to be covered and not the child. The child has no need for life insurance cover. There are often arguments in favour of the premium waiver benefits in case of policies for children. See the table below giving comparison of the cost involved in the child policies vis-à-vis a simple term plan from a leading insurer. It clearly shows that a high value term plan is a better option. The monies received from the claim of a term plan policy should be sufficient to cover the above requirements apart from other responsibilities that the parent may have in his role of the bread earner for the family, like retiring any outstanding debt and providing for the rest of the family. In face of the benefits provided by the low cost high value term cover, the premium waiver benefits etc. will pale into insignificance.
What should you do?
Instead of arriving at an ad hoc value for the insurance you require, you can go for a need based calculation. The term cover value should be sufficient to fund daily living expenses, life goals of the family, including those of the children, the surviving spouse and any other dependents. The need based calculation takes into account the existing insurance, any alternate income sources, existing assets that can be used to fund goals, inflation and taxation. This kind of working will give you a realistic picture of the value of cover that you require.
Once the correct insurance value has been purchased, you can peacefully start building your assets by investing in appropriate financial instruments depending on your risk profile. Creating a diversified portfolio of investments will help you achieve the goals for your children.
What if you already have these kind of policies?
Most often we come across cases where there are many child policies which have been already bought. It is a tough decision to do away with these policies when you realize that it was a mistake. To help you decide on your course of action regarding such polices you need to see how these premiums are affecting your cashflow. In case you have sufficient cashflows to manage all your life goals, you may choose to continue these policies. If the premiums are high and you are feeling the pinch in terms of meeting your goals requirements, you should look at surrendering these policies even if they mean taking a loss. You have another option wherein you can make the policies paid-up and stop paying future premiums. Getting into the fine print of the surrender value clauses/discontinuance clause in your insurance policy will give you an idea whether it is better to surrender or to make the policy paid-up. It will also show the appropriate time to exit these policies in terms of the penalties levied.
In a nutshell, child insurance policies do not offer any additional benefits for your child’s financial security. You should buy suitable products to cover the needs of insurance and investment. A combination of a term cover and simple investments like mutual funds will provide a much better chance of meeting the financial needs of your child.
Kiran is a member of The Financial Planners’ Guild , India (FPGI). FPGI is an association of Practicing Certified Financial Planners to create awareness about Financial Planning among the public, promote professional excellence and ensure high quality practice standards