When it comes to any product that deals with the child, the seller has a unique benefit. They can often play with the emotional side of parents who are willing to forgo logic when it comes to their children. Child insurance plans exist because they explore such an emotional loophole.
“Child insurance plans are designed to offer a combination of life insurance and investment. These plans provide life cover for the parent or bread earner of the family, ensuring that the child’s future needs, such as education, post-graduation studies, or marriage, are secured in the event of the parent’s death,” says Aditya Mall, appointed actuary, Future Generali India Life Insurance Company.
Plans generally offer premium waiver benefits, which come into effect in the event of an untimely death of the policyholder. Under this benefit, post the event of death of the policyholder all the future premiums are waived, but the policy remains active with all the benefits intact. “This ensures that the financial goals for the child are met without interruption. Alongside the life cover, child insurance plans also allow parents to systematically save and grow a corpus, which can be used for the child's education or other significant milestones,” says Mall.
Should You Go For Them?
While child insurance plans may have perceived benefits, you should not go for them. To begin with, you should never mix investment with insurance. Child insurance plans do provide a guaranteed return which may sound good, but for the very same reason they offer subpar returns.
“Parents should consider purchasing insurance products only for risk mitigation purposes, and these won’t work as investment products as the nature of insurance and investment is different, and they should never mix insurance with investment,” says Hrishikesh Palve, Director, Anand Rathi Wealth.
Why Child Insurance Plans Are Not A Good Idea?
‘We think that life insurance is best only from a term insurance perspective keeping costs and returns in mind. “This helps to secure the child’s financial future in case of an unfortunate event like the death of a parent. Along with term insurance plans, we advocate investments into equity mutual funds from a long-term perspective keeping specific goals in mind,” says Gaurav Goel, a Sebi-registered Investment Advisor, Lamoksh Investment, a wealth management firm.
If you buy term insurance and invest the rest in equity mutual funds, not only will you have higher life insurance cover, but the investments you make for your children have the potential to grow much faster if you invest in equity.
“For an investing purpose, parents can consider investing in mutual funds in the child's name with a representation of a legal guardian/parent. Investing in mutual funds offers market-linked returns along with proper diversification and liquidity,” says Palve.
Such investments have lower costs, are liquid, and generally, the returns are superior. Care should be taken to ensure that such investments are in line with the risk profile. “In case the risk profile is conservative, then we recommend investing in a cocktail of financial instruments like the Public Provident Fund (which has a yearly investment limit of Rs 1,50,000) and debt mutual funds along with term plans for the parents,” adds Goel.
To sum up, never mix insurance with investments. In case you want to give your child a good education in a context where education costs are rising very fast, equity investments are the only option.
