Armoring Your Child Against All Odds

There is no better joy than welcoming a new life into the world. As a parent, you want the best of everything for your little bundle of joy, but somehow, the thoughts of the unforeseen future always lurks at the back of  the mind, and you would not want it to affect your child’s future at any cost. Therefore, apart from including your child as a nominee in your term plans, a life insurance cover for the child is also important.

According to financial planners, education and marriage for children tend to be the most common goals that parents have in mind. However, parents tend to buy child-related insurance plans to meet the financial requirements for pre-defined events, such as education and marriage costs. In the case of education cost, a parent may buy an insurance plan, which provides regular payments each year when the child goes to college for  higher education.

Santosh Agarwal, Chief Business Officer, Life Insurance, Policybazaar, stated that most parents, looking to secure their child’s future prefer to invest in Unit-Linked  Child Plans. Agarwal said, “No parent wants to think about the worst scenario that could occur to their children. But having a life insurance for your child can build a safety net for their future. Investing in a unit-linked child plan can be the best bet parents can have for their children.” Also, the future premium are waived off in case of the untimely demise of the policyholder within the policy period, she added.

Agarwal also added that a child plan will help not only in case of any unfortunate event, but also take care of major life events like their education, higher studies abroad, marriage and career goals. Also, the child insurance plan will continue even after the demise of the policyholder. In such a scenario, the insurance company pays the future premium till the term continues.

Vishal Dhawan, Founder and CEO, Plan Ahead Wealth Advisors, stated, “Flexibility is very critical for these goals, as they tend to be long term and the needs could change, along with when the funds are needed. Thus, it is normally advisable to do this through a combination of an open-ended mutual fund with a good track record, and a term insurance plan  to cover the risk of early death of  the parent.”

Financial advisors also recommend non-life plans for a child to their parents. Munish Sharda, MD and CEO, Future Generali India Life Insurance, said, “Life insurance works on the principle of insurable interest, which in simple terms means that there is a financial loss to the family due to the demise of the insured. Going by this principle, life insurance policy for children is not advisable. However, child education policy that ensures continuity of education or provides a lump sum benefit for funding his or her higher education is highly recommended.”

According to Sharda, in child education plans, earning parents either propose or take policy in their name with the child as the nominee. These plans can be taken for an appropriate cover amount that is equal to the future cost of higher education of their children. Therefore, in case of the unfortunate demise of the parent, the child’s higher education expenses can  be met.

“One can opt for a specific child education plan or a combination of a Term Plan that provides a regular income stream and an assured savings plan, which will provide a lump sum or series of payments for the child’s education,” Sharda added.

According to Melvin Joseph, certified financial planner and Founder, Finvin Financial Planners, “Such schemes are not flexible. If you want to reduce or increase the investment, it is not possible. Once you join the scheme, there is no escape route. If you stop paying premium, then the returns can  be pathetic.”

So, even if you surrender the policy after paying for a few years, you may not get what you have already paid. Joseph stated that all insurance schemes are designed with certain basic assumptions regarding mortality, interest rate and bonus. Any extra feature which is added, comes at an extra cost, even waive off premium comes as an additional cost, under the section of mortality charges.

Joseph suggested some alternatives for both conservative and aggressive investors. For the conservative investors, it is better to purchase a term policy and open a PPF account with the Sukanya Samriddhi scheme, the benefits of which is more than the insurance policy. Also, they get the opportunity to increase or decrease your investments in PPF every year. While for the aggressive investors, Joseph suggested to purchase a term policy and start SIP in equity mutual funds for child goals.

Although many financial advisors do not promote the idea of purchasing a life insurance for the children, given their low return and lack of flexibility, however, they do advise clients to purchase a life insurance cover in their name in order to provide financial relief to their children.

But what the majority of the advisors actually suggest is to purchase education plans as they act as a buffer at the time of any contingency like the demise of  a parent.

ashfaque@outlookindia.com