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Insure Your Child’s Future

Don’t buy a child insurance plan for sentimental reasons, ask yourself if you really need one…

Child insurance plans are popular because they promise to secure your child’s future. So a lot of people buy them for sentimental reasons. But before buying one, ask yourself whether you need this policy at all. If you decide to buy one, ensure that certain features are present in the plan.

If you look under the hood, child insurance plans are essentially insurance cum investment products. They could be either unit-linked or traditional products. The life of either of the parents is insured by these plans (it is best to have the breadwinner’s life insured).

Do you need one?

As we have always maintained, you should fulfil your insurance and investment needs through separate products. So instead of buying a child plan, we would suggest that you buy adequate term cover to meet your insurance needs and buy diversified equity funds to meet your investment needs. If you are a conservative investor, then you could invest in Public Provident Fund (PPF) instead of diversified equity funds. Buying separate products has two advantages: the costs are lower and you have greater flexibility. If the mutual funds underperform, you can shift to another fund. Not so in the case of Ulips where you are locked in for five years.

Some people argue that if the breadwinner passes away and the family gets the sum assured from the term plan, that money gets spent on other things. When the children come of age and need money either for higher education or marriage, there is nothing left from the insurance corpus. We don’t necessarily buy this argument. If the term cover is adequate, then a part of it could be invested in products that yield an assured monthly income (say, Post office Monthly Income Scheme) for the family while the rest of the corpus could be reinvested to meet future needs.

According to proponents of child insurance plans, these (especially type II plans) are beneficial because they pay a sum assured on the parent’s death and also pay the fund corpus when the plan matures. The latter would coincide with the time when the child has come of age, so this money can be used to fund either the child’s higher education or marriage. We believe the term plan-mutual fund combination would do better, but if you buy this argument and want to purchase a child plan, keep in mind the do’s and don’ts given below.

Points to remember

Buy a Ulip. When you invest for your child’s future, it is a long-term investment spanning 15-20 years. Over such long periods, equities outperform fixed-income instruments. Therefore, invest in a unit-linked insurance plan rather than in a traditional product. The latter invest predominantly in debt products whose returns are low. What is worse is that traditional products pay simple interest. Buy a type II plan. Type I plans pay either the sum assured or the fund value, whichever is higher. Type II plans pay both the sum assured and the fund value (their premium is higher). It is best to choose a type II plan. Include the waiver-of-premium rider. Make sure that the plan offers the waiver-of-premium feature. This means that in case the parent covered by the plan passes away, the family does not have to pay future premiums but the policy continues to be in existence and pays the accumulated fund value on maturity. This is perhaps the most important benefit that a child plan offers, so make sure it is in-built into the plan (they charge for it, of course, but it is something worth paying for). If not, buy this feature as a rider. Low cost. Buy a plan whose cost is low and hence the internal rate of return (IRR) is high. Also look for a policy where the charges are less front-loaded.