Insurance For Children

Arundhati Singh, Dalal Street Investment Journal

The greatest fear man has known is the fear of the unknown. As a remedy, the concept of insurance was born. It entails paying a small fee (premium) in return for an assurance that the person will be protected in the event of a calamity or failure of any form. The history of insurance in India dates back to 1818, when it was conceived as a means to provide for English widows. Today, it has evolved to touch every aspect of our life in the form of life insurance, accident insurance, health insurance, etc. One such facet in the life of a parent is to secure his/her child’s future.

Why Child Insurance?

With the cost of living skyrocketing, bringing up a child involves meticulous planning and provisioning of adequate finances such that they are available at the time of genuine requirement for instance education, marriage or other medical eventualities. In order to fulfill this expectation, parents must opt for a suitable, long term and effective investment strategy. Children’s insurance plans help in addressing many of these needs and secure the financial future of your child. “There is a need to build a corpus that allows parents meet the major expenses of their children in the future. Besides providing life cover to ensure that the child’s dream is secured, insurance also offers the choice of guaranteed returns or the flexibility to manage fund options to help money grow as per their needs,” says Fabien Jeudy, Chief Actuarial Officer - Birla Sun Life Insurance Co. Ltd.

How It Works?

“There are a host of insurance options to plan for your child’s education and other important milestones. However, the ideal approach is to choose a plan that best suits your appetite and aspirations,” says Jeudy. “Furthermore, all insurance premiums paid towards child plans – traditional and ULIPs – will qualify for tax benefits under Section 80C, which has an overall limit of `1 lakh along with other investments. Those who start early benefit from a gamut of ‘low-risk’ options,” Jeudy adds.

Types of Child Insurance Child

Traditional - Endowment Policy: These are policies that pay a guaranteed return at a lesser rate of growth. They get paid out as a lump sum amount after a certain tenure. A child’s marriage or higher education is funded through these kinds of policies. Examples: Kotak Life Child Advantage Plan and Jeevan Kishore by LIC.

Child - Traditional - Moneyback Policy: These policies return a certain percentage of the sum assured on a periodic basis so that a child’s financial needs such as tuition fees, etc can be met. Examples: Komal Jeevan by LIC and Met Bhavishya by Metlife India Insurance Company.

Child ULIP Plans: These are unit linked based plans involving a high rate of growth (15-30 per cent) and greater market risks. Examples: TATA AIG’s Invest Assure Flexi and Smart Steps Plus offered by Max New York Life Insurance. Other flavors of such plans include the addition of a life cover with the basic plan that provides for an immediate payment of the sum assured upon death of the (parents’) life assured during the term of the policy and in some cases a waiver of the premium as a rider where, in case of an eventuality, the family of the insured will not be burdened with future premium payments on the child plan. The insurance company will make the premium payments towards the plan. Important Considerations

Take the following factors into account before deciding on a child insurance plan:

Adequate Sum Required: The insurer has to plan ahead of time keeping in mind the rate of inflation and decide on the adequate sum that his insurance policy should return to him after maturity to meet his child’s specific financial needs.

Rider Benefits: With the insurance sector open to private players, companies go that extra mile and give rider benefits with their base plans. Examples: Accidental Death Benefit, Total and Permanent Disablement Rider, Premium Waiver, etc.

Competitive Pricing and Returns: During the initial years, a portion of the premium goes into maintaining the administrative costs such as allocation costs, distributor commissions, etc. One has to look for schemes that spend a lesser portion on such costs for a higher investment return.

Assured Amount For Children: The base sum assured to the child in case of an eventuality such as a parent’s death should be sufficient to take care of his financial needs in the absence of the earning member of the family. Priyanka Bhargav, a parent, has invested in a children’s plan named LIC-Jeevan Chaya. As per the policy, she says, “In case of my demise, my child and my husband will be entitled to receive the assured amount periodically.”

The Insurance Company’s Claim History: Ratings and scores given by various credit rating organizations such as CRISIL and ICRA form a base to judge the credibility and viability of an insurance company and the policies they offer.

Are they worth the money?

A child insurance plan turns out to be a slightly costly proposition as a large portion of the funds invested as premium gets deducted by way of premium allocation charges and distributor commissions that results in a low return on investment. The coverage per rupee is less when compared to traditional term insurance. Also, the sum assured is usually inadequate for the family in case of untimely death of the earning member. You can get the same tax benefits with a combination of term insurance and mutual funds.

Speaking from a parent’s viewpoint, Bhargav says, “One should not bother about returns but only consider coverage in case of an eventuality and invest a reasonable amount which they can spare every month.” She further says that parents should definitely opt for LIC as it gives a sovereign guarantee of the assured amount and it is easy to reach out to them even in the remotest part of India.

In summary, irrespective of what kind of child insurance- cum-investment you put your money in, you need to

remember that the earlier you start, the better your child will be rewarded. “Insurance is a long term investment product and hence the sooner you sow these seeds of savings and investments, the better are the chances of your money growing into a big enough tree to provide for the future needs of your child/children,” Jeudy concludes.

PERSPECTIVE:  Rajesh Kumar Gupta, CFP 

How advisable is it to go for children’s insurance?

Children do not need insurance. It might sound strange that I am saying such a thing when almost all insurance companies in India have so many plans for children. According to the very basic concept of life

insurance, a human being is an income generating asset, hence they have a human life value which is calculated on the basis of the amount needed to be provided by them to their dependent family members for a certain duration with respect to inflation and other financial factors. Interestingly, you don’t need insurance if you do not have dependents or any liability or a desire to do some charity after your death through a charitable trust. Consider a case, where a child dies due to a mishap. It is a personal tragedy and irrecoverable emotional loss but the family income will not suffer.

Now the question arises that why these plans were introduced and became so popular?

Insurance has one ‘Law of Insurable Interest’ which mentions that ‘parents have insurable interests in the lives of their children’ and as it is one of the strongest human bond which can be easily manipulated by insurance companies to increase their sales. In the light of above facts, practically it is not advisable to go for children insurance; but parents can do investments for higher studies or marriage of their children and to nurture his/her talents and to do that there are other investment products in India which can give better growth to their hard earned money.

When is the right time to start with children’s insurance (investment) plan?

As soon as the child takes birth, parents can start doing investments. They can opt for systematic investment planning by contributing a fix amount monthly and as their income increases they can increase the contribution to have desired amount.

What kind of insurance should one take for his/her child?

Every year new diseases are introduced in India and children are always at higher risk; if any insurance is

required then parents should take medical insurance for their children as in case of any emergency they need to shell out huge amount of money from their savings which can have detrimental effect on their financial goals of life.

How should one decide on amount of insurance?

In today’s scenario, one should take at least 3 to 5 lacs of medical cover for their children.

What are the best options available on children insurance?

For investments, there are better options available in the market than children insurance plan; one can take

help of professional financial planners to decide on the amount of investment and to select the right instruments of investment. A proper asset allocation can generate desired results.

What are the pros and cons of such plan?

-Pros:

_ A feel good factor by doing investment for their offspring.

_ Income tax saving up to the limit of `1 lakh under Sec

80C.

-Cons:

_ Paying higher mortality charges to insurance companies which they can use to increase their term insurance cover to provide greater safety umbrella to their family.

_ Losing on the opportunity cost of investment by not opting for better investment products available in the

market.

_ Compromising on meager returns.

Source: Dalal Street Investment Journal, dated December 6-19, 2010