ULIP, traditional plan or SIP? Why parents should separate insurance from child investment goals

Right investments for your child

• Do not mix insurance and investment needs when saving for your child's future
• Opt for a term plan for life cover and invest separately in equity mutual funds
• ULIPs and traditional plans have lower returns and liquidity than mutual funds.

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Confused between ULIPs and traditional insurance plans for your child’s future? Today's Ask Wallet Wise query decodes before choosing either, it’s crucial to understand why mixing insurance with investments can hurt both returns and protection and what a smarter strategy looks like.

I am a salaried employee working in the private sector and am interested in saving for my eight-year-old child. I am confused between ULIPs and traditional insurance plans. Please guide me.

Expert's Advice: Please understand the most important principle of investing: never mix protection and investment needs while selecting a product. If you buy an insurance product as an investment, you neither get adequate life cover nor satisfactory returns in the long run. You should buy a pure term plan for life cover and invest separately in equity schemes of a good mutual fund house.

Though ULIPs are sold as investment products rather than insurance products, they have various ongoing charges that reduce overall returns. Moreover, ULIPs suffer from liquidity issues, as you cannot access the money before completing five years, even if you surrender the policy earlier.

Traditional life insurance plans also do not offer good returns. Historically, they have delivered around 5–6 percent, which does not even beat inflation. Hence, neither option is advisable. As a thumb rule, buy life insurance cover equal to 10–12 times your annual income through a term plan, preferably online.

Invest the surplus in a mix of 80 percent equity mutual funds, 10 percent PPF, and 10 percent gold funds. It is also advisable to decide in advance the corpus you want for your child at a specific age and invest accordingly through monthly SIPs. You may start with passive funds like index funds and gradually move to active funds once you gain confidence.

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.

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