Truth Of Child Life Insurance-Cum-Income Plans: Is It Trap or Investment Opportunity?

For many years, numerous companies have flooded the market with enticing offers of savings cum life insurance plans or income-insurance plans for children. But amidst the allure of financial security with savings, the pertinent question is "Do children need life insurance?" According to financial experts, life insurance is meant for individuals with financial dependents, simply put the breadwinners of the family. The absence of financial dependents on children negates the necessity for life insurance for them.

What Do Experts Say?

Sebi Registered investment advisor (RIA) Melvin Joseph, founder of Finvin Financial Planners said, "Children don't need any life insurance. Such policies are a combination of investment and insurance specially designed for emotional selling. You should not purchase such policies. They offer poor returns with no flexibility. The breadwinner of the family should purchase high-value Term insurance on his life and invest in mutual funds and PPF for the benefit of your children."

Swapnil Kendhe, a Securities and Exchange Board of India (Sebi)-registered RIA said, “ Where is a need to take life insurance for a child? If you want to invest in a child's name, use investment-only products."

Poor Returns 

Despite being an insurance policy company, many insurance companies offer hybrid products combining insurance and investment that offer paltry returns. A recent example of paltry returns can be seen in a newly launched insurance cum investment plan, which promises both security and returns over time.

The plan on its website shows an annual premium of Rs. 84,275, payable over a minimum period of 5 years, totalling Rs. 4,21,375. With a guaranteed addition of Rs. 40,000 per year and a sum assured of Rs. 5 lakhs, the policy term is 20 years.

• Total premium payable in 5 years – Rs 4,21,375

•  The guaranteed addition is Rs 40,000 per year

•  Sum assured as per this variant is Rs 5 lakh

• Policy years- 20 years

•  The approximate maturity amount after 20 years, is Guaranteed addition plus sum assured (40,000 *20+ 5 lahks) which is Rs 13 lakh. The average return thus comes to 5.5 per cent.

With an average return of 5.5 per cent, the scheme returns are comparable to many savings bank accounts. Furthermore, such schemes lack flexibility rendering it a threatening proposition. Once enrolled, altering the investment's nature or exiting the plan is impossible. If you stop paying the premiums the returns will further go down. Surrendering the policy after paying for a few years will cause your surrender value to fall even below the principal paid. Essentially the scheme is a trap.

With education inflation surpassing 8 per cent and if you assume a retail inflation rate of around 6 per cent, the actual value of the promised maturity amount of Rs 13 lakh further falls after 20 years.

In light of these factors, never fall into the trap of child life insurance cum income plans. Instead, go for investment-focused products that offer greater higher returns and keep your insurance plans separate.