Is a child insurance plan worth it?

Many of us have experienced the sequence of events described herewith. After the initial euphoria of the birth of one’s baby has subsided, we decide to buy a child-specific insurance plan to secure the future of our family's newest member. These schemes have been bestsellers for most life insurance companies and thus form an important part of their portfolio, the reason being that it is easier to sell a story to parents about their child’s well-being and safeguarding their children’s future from any undesirable events. Many parents, thus, are completely taken in by the sales pitch of the insurance companies of their child being able to manage his or her life in the absence of a parent.

In addition to the sum assured that is paid at the time of the policyholder’s demise, future premiums are waived off and the fund value is made available to the child on maturity. Riders providing for loss of income arising out of the parent’s (the insured) death or disability are also touted as one of the reasons why child plans score over other investment options. Most companies also offer a waiver of premium riders, which ensures that the company continues to pay the premium if the parent passes away. Over a period of say 15 years, regular investments will ensure that the fund grows into a substantial amount, which may not be possible in case of a one-time investment.

We, as parents, have various options to choose from such as simple bank fixed deposits, public provident fund, Reserve Bank of India bonds, diversified equity mutual funds, post office instruments such as a monthly income scheme and, of course, pure equity. Most parents invest in more than one product to secure the future of their children. Many fund houses also offer dedicated MF schemes for children. Some of these are HDFC Children’s Gift Plan, ICICI Prudential Child Care, LICMF Children Fund, Magnum Children’s Benefit Plan, and Tata Young Citizens. Anyone can invest in the name of his/her child below the age of 15 years. When the child turns 18, s/he has the option of withdrawing the money completely or doing so in a phased manner.

However, experts are of the view that these funds are not necessarily meant for children. They are more of a marketing plan which fund houses adopt to woo investors. After all, even a simple equity diversified fund is capable of generating a similar performance. While debt or income funds provide guaranteed returns, their ability to generate higher returns is also constrained. In the long run, equity is the best-performing asset. Moreover, since the children’s needs are a good ten years or more away, you also have enough time to weather the volatility in the market. Hence, the experts’ advice is to seriously consider equity schemes while investing to secure your child’s future.

Likewise, while it is convenient to invest in insurance plans, it is an expensive proposition. Financial planners are of the opinion that one should never buy an insurance policy with an investment objective in mind. They may be popular, but they are complex in nature, making an analysis of their performance a difficult task. Despite the cap on ULIP charges, the costs cannot be termed reasonable. Additionally, they don’t yield significantly superior returns to justify the huge charges levied. Child ULIPs are, in fact, costlier than even regular ULIPs, owing to features such as waiver-of-premium and loss-of-income riders.

One of the best ways to plan for your kid is by investing in diversified equity MFs with a good track record, as they are flexible instruments that offer an optimum mix of return, liquidity, and tax efficiency. However, the equity component means they come with associated risks. You should go for them if you are prepared to be in it for the long haul and digest short-term hiccups. Experts advise starting an SIP (systematic investment plan) in a diversified equity fund and staying invested over the long-term as the right approach for financially securing your child’s future. An SIP in a large-cap, equity-diversified fund should be combined with a term insurance cover to safeguard your child’s future.

Though there is nothing to be gained in monetary terms if you survive the tenure of the policy, you would have ensured a large sum for your child in your absence at a fraction of a ULIP’s cost. Investing for a child is no different than investing for yourself. The principles remain the same. All the attractiveness of the death cover, disability cover, and so on can be obtained by pure insurance plans designed to cover them. This will make sure that your child’s future remains secure, no matter what. Also, the money saved by not investing in a child ULIP can be put to better use elsewhere.