When William Shakespeare coined the phrase "What's in a name?" in 1579, little did he know how pertinent it would be a few centuries down the line, in the time of mis-selling and aggressive marketing. Especially in the field of investments, where the slogan "Everything is in the name" holds true. A classic example of this is children's insurance plans and the ludicrous offers each plan provides.
Culturally, Indians are entrenched in family values and it doesn't come as much of a surprise that securing one's children's future sits at the top of most parents' priority list. Making sure that the coming generation has a superior quality of life and better opportunities is what all parents want. Insurance companies take undue advantage of this fact because there is no better marketing ploy than striking an emotional chord, compelling parents to do something for their children.
As a result, instead of focusing on providing for the children's goals, parents often simply take insurance for the child and feel they have secured their child's future. They often ignore the most important aspect, that is building a corpus for meeting their children's goals. The goals for this corpus vary from children's education and marriage to any other varied interest they might have and can be fulfilled through Mutual Funds and other investment avenues. However, insurance is one of the most unsuitable ways of building up a corpus.
Does your child need insurance?
So why do parents focus on insurance and not their children goals? Aggressive marketing of specific plans for children is the main problem. People are made to believe that any product that is labelled as "Children's Plan" is the best option for getting an insurance cover for one's child. There is no reason for a child with no dependents to have insurance because insurance is put in place to provide for the child in the event of a parent's untimely death and not the other way around.
What exactly are children's insurance plans?
These are basically investment-oriented insurance plans. Most child specific insurance plans provide a cover for the parents with the proceeds of the policy going to the child (or appointee in case of a minor), in case of the untimely death of the parent. There are some plans that provide life cover for children.
This traditional form of insurance merges saving with some sort of protection. Most such products give a year-end bonus that adds to the corpus and is received at the maturity. However, this bonus is only paid on the sum assured and not on the compounded returns.
- Money back
Instead of paying back the entire amount when maturity is reached, these policies give back to policy holders small amounts of money at different points in time. 20% of the sum assured is given after the first four years, another 20% after the next four years and so on. On maturity, the last 20%, along with the accumulated bonuses is paid. Riders like critical illness, personal accident, term and waiver premium are included in most policies.
A Unit Link Insurance Plan is an amalgamation of insurance and mutual funds. Within this type, you receive units and a part of the premium is used to account for an insurance cover. The rest gets invested like a mutual fund. However, the charges for ULIP's are very high.
What is the best choice to make?
While ULIPs are extensively marketed when it comes to insurance for children, when it comes to equity investments, preference should always be given to diversified equity funds over ULIP's. ULIPs not only offer less flexibility in terms of investment options and switching midway, but also have very high inbuilt costs, especially in the initial years. That is why, your overall wealth building will be lesser as compared to any pure investment options.
The debt space provides better options. PPF and EPF provide good investment opportunities. Endowment and money back policies are best avoided by both, children and adults alike. The reason for this is its obscure nature and 4-6% returns.
Thus, as parents you must not fall for child specific insurance products and "Children's Plans". Keep your insurance and investment decisions separate . The plan should be to cover risk through pure insurance products like Term Plans and opt for mutual funds for the purpose of investment.
Amar Pandit, is a Chartered Financial Analyst and the Founder, Chief Happiness Officer at HappynessFactory.in