Publication: DNA, Mumbai; Date: Dec., 9, 2006; Section: Personal Finance; Page: 6
You and your child will do well by keeping insurance and investment decisions separate
Whats in a name” might sound cliché, but in the financial services industry, “Everything is in the name”. Classic examples of this are the ludicrous childrens insurance plans on offer. Its difficult to get a better marketing ploy where the idea is to strike an emotional chord with parents to do something for their kids.
The other day a friend called and asked me “Can you suggest some good Childrens Insurance Plans.” To this I asked, “What objectives are you trying to accomplish?” Pat came the response, “I heard that these are great investments. My aunt has been touting the 30% return that this policy has given in the last 3 years”.
Most parents today would probably think like my dear friend when it comes to investing for their children. This is one of the biggest mistakes that one could make. Just because a product carries the label “Childs Plan” does not make it relevant for children or the best option for them. Who says PPF cannot be used for children or diversified equity mutual funds cannot be utilised for achieving childrens goals.
The key point in investing for children should be to build a corpus for them. Corpus might be required for different goals such as the childs education, marriage or any other interest. This corpus can also be built through PPF, EPF, mutual funds, stocks, and real estate. In fact, insurance is one of the most inefficient avenues to invest in for children.
What exactly are childrens insurance plans?
Childrens insurance plans are investment oriented insurance plans. For most plans, the life of the parent is covered and, in case of the unfortunate death of the parent, the child (or the appointee in case of a minor) would get the proceeds of the policy.
However, there are some insurance plans like Tata-AIGs Assure Educare, and Kotak and Birlas Children plans where life insured is that of the child.
First, I find it difficult to comprehend why a child with no dependents would need insurance. I believe insurance is meant to provide for the child in the untimely death of the parent and not the other way round.
Different types of children insurance plans
Endowment
This traditional form of insurance combines saving (because money is due on maturity) with some protection (your nominee gets the sum assured if you die). This is LICs forte and you will see several products from LIC here, such as Marriage Endowment, Jeevan Anurag and Jeevan Kishore. Most of these products declare a year-end bonus, which adds to the corpus and is paid at maturity.
However this bonus is paid on the sum assured only and not on the compounded returns. Most of these policies might yield in the range of 5-6%.
Money back
Instead of paying the entire amount at maturity, these policies give back money to the policyholders at different points in time. It will give you 20% of the sum assured after the first 4 years, another 20% after 8 years, and so on. On maturity, the last 20% along with accumulated bonuses is paid.
LICs Komal Jeevan is one of the popular money back policies. It is the only one with a guaranteed bonus of Rs 75 per Rs 1,000 addition every year. However, the premium of this policy is much more than that of other childrens plans.
Riders such as critical illness, personal accident, term and waiver of premium are available with most policies.
Ulips
A unit linked insurance plan is like insurance combined with a mutual fund.
You get units just like in a mutual fund. A part of premium goes to provide an insurance cover (mortality charge) and the rest is invested like in a mutual fund. However, the charges are killing in the first year and, for some companies, even in the second.
There are some international products where there are 100% charges in the first year. Some of the popular Ulips in the childrens space are ICICI Prudentials SmartKid, HDFC Unit Linked Young Star etc.
What choices should you make?
When it comes to equity investments, prefer diversified equity funds over ULIPs.
Why pay costs of 20% -70% on your investments in the first or any year. Some insurance enthusiasts might propagate that insurance is for the long term. You might also come across calculations to justify the costs which state that, over a period of 25 years or so, insurance plans would do well if we consider a 10% return on “A” insurance and “B” mutual fund. One should note that the basis of competition in the investment management industry is returns, and you cant even compare Ulips and mutual funds on this criterion to justify the costs. The best fund managers in the world are not found in the insurance industry but in mutual fund houses.
Better options exist in the debt space too. One can look to invest in PPF and EPF (make voluntary contributions to your EPF if you like. With interest rates at 8.5 % now, this is one the best options available for your child in the debt space with no cap on maximum investments).
Endowment and money back policies are best avoided whether for children or for adults due to opaqueness and 4-6 % returns. However, remember that insurance is important and make sure that you have sufficient cover to take care of your childs future.But, opt for a pure term plan.
To summarise, you and your child will both do well by keeping insurance and investment decisions separate. Cover risk through insurance products and look to invest in mutual funds or even your employer (EPF).
amar.pandit@gmail.com
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