Child plans – do they fit the bill?
DNA Money Bank & Risk
Securing your child's future and his financial requirements is no doubt a priority. For insurance companies, this spells an opportunity that they just can't let go of. The question, however, is what works best for the child -- an insurance cover or a wealth creation plan.
Is it worth the money?
There are two avatars for child insurance plans at present – a child Ulip (unit-linked investment plan) and a traditional child plan. It's usually the latter most insurers keep in their portfolio. The guiding principle of a child insurance is simple: it promises to take care of your child's needs if you are not around. This means that in case of the death of a policyholder, all future premiums are w
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However, most financial planners feel these plans don't quite measure up. A term plan that covers your insurance requirements and comes at half the cost can definitely be a better option.
"Going for a child plan is a costly affair for parents because of various reasons. The ones offered under the Ulips umbrella are like any other unit-linked plans. And there are a lot of hidden charges like policy administration, premium allocation and so on. Even traditional child plans are a costly option. This is because traditional ones only yield a return of 4-4.5%. Also, parents will have to shell out more in terms of sum assured to get a decent return," says Suresh Sadagopan who runs Ladder 7 Financial Advisories.
The right option
Insurance companies, however, have a different spin, saying these plans can come in handy in case the policy holder dies early as there is a double benefit because future premiums are dropped while investment goes on.
But when it comes to the cost factor, other products have a distinct edge. A pure term plan comes dirt cheap – which can be as less as one tenth of costs of other plans. Take, for instance, a term plan of `50 lakh, where the premium you need to pay will be somewhere between `8,000 and `10,000. On the other hand, the premium for a child Ulip could set you back by as much as `1-1.50 lakh.
Instead of shelling out `1,40,000 for a Ulip, the same money if parked in a fixed deposit or a public provident fund (PPF) every year for your child's education would get you better returns. But some argue that a Ulip invests in equities, which therefore may yield more in the long run. But even this argument doesn't really wash simply because you can opt for equity investments via mutual funds, and not necessarily through a Ulip route.
In fact, most planners think the whole premise of child insurance is flawed. The idea of a life insurance cover is to take care of your dependants after your demise. And in case the child dies, he will not be left with any financial dependants. "A child plan is not recommended because a child does not need insurance as insurance policies are meant to replace income source by a corpus. The emotional aspect of investing for your child is how agents try to pass on these plans to ignorant investors. Parents should look at other options like systematic investment plans (SIP), MFs and so to finance their children's needs," says Jayanth Vidwans from Society of Financial Planners.
The moral of the story is you are better off even if you give a child plan a miss.
HANDLE WITH CARE
To start with, child insurance promises to take care of your child’s future financial needs. This comes in two forms - traditional and Unit linked investment plans( Ulips)
But financial planners are not too enthusiastic about them. These are costly investment options, they say. Returns too are another turn-off.
A better alternative touted is a term cover that sizes up well from a cost perspective as well as returns they fetch.
If you are interested in equities, you can invest through mutual funds, and not necessarily through a Ulip route.
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