Why Child Insurance Plans Rarely Deliver What They Promise

Child insurance plans will often advertise in a way that tells you that it will help you fulfill all educational goals of your child, but that is a story that is not always true. If you invest in such a plan for your child’s education, you may drastically fall short of the required education corpus when the time comes.

Returns Do Not Beat Inflation 

Most traditional child insurance products provide slow and steady, but limited, growth compared to higher-than-inflation growth, and because education and living expenses increase faster than inflation overall, returns from these types of products may not keep pace. Education inflation in India is eight to 12 per cent, and that is higher than retail inflation. A traditional insurance child plan gives returns of anything between 5.5 and six per cent, and hence it is woefully inadequate to beat inflation.

“In addition, the primary purpose of these types of plans is to help families save for future expenses in a structured manner, rather than provide them with higher investment returns, in addition to being able to provide life, health, and other insurance-related protection,” says Arun Ramamurthy, co-founder, Staywell.Health.

Child Plans Are Illiquid 

Another issue families face is related to the inability to access cash due to long-term lock-in and liquidity restrictions. The lock-in could be a period of five years or till the child earns 18, whichever is earlier.

In the event of a job loss, medical emergency, or a change in educational direction, limited access to their savings significantly limits the financial flexibility of the family. “The financial services industry purposely places these restrictions on child plans to create a long-term investment corpus, but this is not a practical reflection of the realities families face on a day-to-day basis,” says Ramamurthy.

Such plans also come with high charges, such as surrender charges and high administrative costs that eat into returns. Parents may fall for the headline benefits due to glossy marketing, but the benefits are lower than expected.

The Mutual Funds Option 

So, a better option always is term insurance for the earning parents. One can get substantial cover for a very reasonable premium. The remaining money that would be used up in buying a child plan should be invested in diversified mutual funds. This is likely to give far better returns as compared to a child plan. Mutual funds are more liquid and can be redeemed when required, though investment in mutual funds would require more discipline.