Tuesday, May 26, 2015

TAKING A CHILD INSURANCE ....HERE'S HELP

 Recently my article on Child Insurance was published in Bank Bazaar.
Link  http://blog.bankbazaar.com/who-else-wants-to-know-how-child-plans-work/

Sadly, due to space constraint, the Full Article was NOT published.
Hence I am reproducing the same here for the benefit of my readers.



Hello Friends,
The Birth of a Child brings lot of joy to parents.
After the initial euphoria settles down, the future expenses start staring at your face. Even if you don’t think on this, the innumerable ads on TV, newspaper, Bill Boards will not let you forget them.
They start emotionally attacking you
“Are you a Responsible Parent”?
“Have you planned for your Child’s Higher Education”?
“Have you planned for your Child’s Marriage”?

So, then, you are forced to start thinking of your Childs Future.
And, what do you see?

Of course, the umpteenth Child Plans splashed across. Whether you like it or not, you will be bombarded with the "specialties" of these plans and the Companies leave no stone unturned to make you feel that they are next only to God when it comes to protect your dear child's future.
They promise you that they will pay for your Child’s Higher Education, her Marriage, etc.
And, yes, these Ads spare no effort to instill fear in you “What will happen to your Child in case of your untimely death?”
This one line is enough for every parent to run to Insurance Agents to get a Child Plan.

Before diving into the sea of these Child Insurance Plans, you will do well to do some basic homework like
1. When will your child need the money?
2. How much will you need for the particular goal (Marriage, Education)?
3. How much you will be able to save?
4. How much Insurance Cover I need?
Besides the above, you will also have to consider various factors like whether you have any loan, you have your own house, are there any other bread winners in family, etc

UNDERSTANDING CHILD INSURANCE PLANS :

There are basically 3 types of Child Insurance Plans namely
1. Money Back :
This is by far the most POPULAR plans. Under this plan, your child will get Survival Benefits at regular intervals.
For ex :
AT your Child's 18 years of age, she would get about 20% of Sum Assured, and a further 20% at age of 20 and so on.
This Plan is useful for those who feel the need for Lumpsum requirement at regular intervals and helps you in Life Stage Planning. 
Another good benefit, is these plans offer Premium Waiver Benefit which ensures that in case of death of Parent, then the Premiums are waived off and the Policy continues with benefits.  (Please make sure, that this benefit is there in policy before taking one).

The BIGGEST disadvantage with these plans is the dismal returns often failing to match even Inflation returns.
Especially, if you are planning to buy Money Back Plans for your Child's Education, then this is definitely NOT advised. Education Inflation is at around 12% and this Money Back should be giving you less than 9%........leaving you grossly underprepared at the time of Goal.
Also, the Premiums are steep and are best avoided.
PLEASE BEWARE OF THE NEW LIC MONEY BACK CHILD PLAN.
The Plan actually covers the Child and not the Parent! (How stupid). So, in case of untimely death of your Child, you will get the Sum Assured. I wonder which Parent would like to take this?? It is your Child who needs Financial Security and not you!
If the Child survives the Term, then you will get the entire Sum Assured along with Accrued Bonus, et al.


2. ULIPS :
ULIPs are Unit Linked Plans which are non-traditional plans wherein Returns are Market Dependent.
Under ULIPs, the Life Insured is the Parent. If, the Parent dies (or in some policies gets diagnosed by Critical Illness), then the Child would receive the Sum Assured in Lumpsum. Not only this, the Future Premiums are waived off (the Company pays the same) and on Maturity, the Child would get the Fund Value too!’
ULIPs plans offer variety of funds ranging from Conservative to Balanced to aggressive.
Under ULIPs, you can change from Debt to Equity and vice versa without the worry of Taxation, thus enabling you to benefit from both Timing the Market and also Rebalancing your Portfolio.


Sadly, the charges are too high in ULIPs. These ULIPs levy a variety of charges on your Child Plan by way of Premium Allocation Charges, Policy Administration Charges, Mortality Charges, Fund Management Charges, etc.
This would affect the returns generated by investment in Market Related Instruments and ultimately the Corpus that your child receives.
 Another negative against ULIPs is in case of Emergency and you want to surrender or do partial withdrawal, the charges are high and also attract Tax.

While a really long Term ULIP (above 15 years) could actually cost less than a Mutual Fund, the flexibility is a huge issue. You just can’t move from one ULIP to another ULIP as in case of Mutual Funds.
Putting money in Child ULIP plans is akin to putting all your eggs in One Basket!
If the ULIP underperforms on a consistent basis, you are stuck!


ENDOWMENT POLICIES:
Endowment Policies are one where lumpsum amount is paid at the time of the Maturity along with bonuses.
This type of Policy is very useful to plan for your Child’s BIG expenses like Wedding, Higher Education, etc
And, unlike ULIPs, there is a minimum guaranteed amount of payment. Besides, you may get Bonuses too. Endowment Policies too invest in Market backed securities, but unlike ULIPs, they invest only in Debt products and the returns too are not exactly spectacular.


There are two major drawbacks with Endowments Plans
  1. The Returns are pathetic, with less than double digits, and come nowhere even near Inflation, forget about the Education Inflation which is in High Double Digits.
  2. The Insurance Cover too is almost always very little. (If you require higher cover, you will obviously pay a steeper premium).
If you do want to take up an Endowment Policy, treat it as a Debt Portion of your overall Asset Allocation.

Almost all Child Insurance Plans cover the Parent and thus, if in an event of an unfortunate untimely death of the Parent, the Child’s needs would still be taken care of by way of Lumpsum payment on death and also on Maturity.



Child Plans are just Attractive Packages with nothing inside.
Yes, on an untimely death of Parent, some policies offer Waiver of Premium and the Policy continues but this benefit comes at a high cost as the Premium increases due to this Rider. And, Mortality Rate Charges for a Child Plan are quite high too.

Insurance should be taken only for covering your Life and should never be taken as a part of Investment. Never.
So, if the Child Insurance Plans are not matching your needs, what is the Alternative??

The Alternative, my friend, is the COMBINATION OF TERM PLAN AND MUTUAL FUNDS:
Term Plans are the BEST way to cover your life as they are very affordable. And Mutual Funds ensure that you get Market Returns without the painful payment of High Charges which you may have to bear in case of ULIPs.

So, in nutshell, my dear investor, please remember that just investing in CHILD EDUCATION PLAN does not guarantee you to get the Money you require for your Child’s education.
You need to invest in the Right Asset Class after taking Protection through Life Insurance Cover.
If you are still a fan of Insurance combo than, you are suggested to take a ULIP, especially if the goal is at least 15 years away.  But, do remember, that ULIPs may leave in the false hope of adequate coverage as the Premiums will be steep as the Cover goes up. They leave you Under Insured.

Endowment and Money Back are a strict NO-NO. Investing in an Insurance Plan which gives less than 10% when the Inflation is growing at 10% is definitely not a wise thing to do.
My Final Take is that there is nothing to beat the Combination of Term Insurance Plan with Diversified Mutual Funds.
And, yes, along with this also invest in other products like Sukanya Samruddhi, PPF, etc
So, dear friends, selecting the right plan for your child is  NO CHILD’S PLAY
Please take the advice of a Competent Financial Advisor. 

Best of luck,
Srikanth Matrubai







Also visit http:/http://goodinsuranceadvisor.blogspot.in/

1 comment:

  1. Very nice blog and i have read your nice information about TAKING A CHILD INSURANCE and Child Education Plan.

    ReplyDelete

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