My dear old friend, Dr John, has settled in Delhi, with his wife and daughter. Every Christmas he pays a visit to his home town Kohima, and religiously drops in for a chit-chat. While his daughter Mary was playing with my daughter, and both our better half were busy in the kitchen, exchanging the latest recipe, John began abruptly:
“You know what, I don’t believe in insurance. What is the point of getting money when you die?”
John again asserted, “I’ve already purchased a three bedroom flat in Delhi, and after all, whom does it belong to? Ultimately it is for my daughter! “
Getting no response from me, he continued.…
“But, I also have done my smartest thing! I’ve invested in a Unit Link Insurance Plan (ULIP) in a Child Education policy. Now, I’m at peace that the future of my child is secure. Have I done the right thing?”
I began my answer with, “my friend, you are not the only one.....!”
There is a huge pool of parents who have chosen a child ULIPs that promise continuity in the funding of the child’s education, in the event of the parent’s death. These schemes have been best sellers for most life insurance companies. It is easier to sale to parents by talking about their children’s future from any unwanted events. Many parents, thus, are completely taken in by the idea of achieving their dream of their child being able to complete his/her education in their absence.
In addition to the sum assured, that is paid in case of the policyholder’s demise, future premiums are waived off and the fund value is made available to the child on maturity. Riders providing for loss of income arising out of the parent’s (the insured) death or disability are also taken care-of as one of the reasons why child plans sales more. Most companies also offer waiver of premium riders, which ensures that the company continues to pay the premium if the parent passes away.
Similar to ULIP many mutual fund houses also offer schemes dedicated for children. Anyone can invest in the name of his/ her child below the age of 15 years. When the child turns 18, she/he has the option of withdrawing the money completely or doing so in a phased manner.
What you need to understand: Most investment experts are of the view that these funds are not necessarily meant for children. They are more of a marketing gimmick which fund houses and insurance companies adopt to woo investors. After all, even a simple equity diversified fund is capable of generating similar performance.
Child ULIP Are Expensive: While it is convenient to invest in insurance plans, it is an expensive proposition. One should never buy an insurance policy with an investment objective in mind. They may be popular, but they are complex in nature, moreover an analysis of their performance is a difficult task.
Despite the cap on ULIP charges, the costs cannot be termed reasonable. Also, one don’t see them generating superior returns to justify the huge charges levied. Child ULIPs are, in fact, costlier than even regular ULIPs, owing to features such as waiver-of-premium and loss-of-income riders.
The Ideal Approach: The best way is by investing in diversified equity mutual funds with a good track record, as they are flexible instruments that offer the optimum mix of return, liquidity and tax-efficiency and with a combination of a term insurance.
A SIP in a large-cap, equity diversified fund should be combined with a term insurance cover to safeguard your child’s future. Though buying a term insurance, there is nothing to be gained in monetary terms if you survive the tenure of the policy, but you would have ensured a large sum for your child in your absence at a fraction of a ULIP’s cost. All the attractiveness of death cover, disability cover and so on can be obtained by pure term insurance plans. This will make sure that your child’s future remains secure no matter what happens to the parents. But make sure that you have a life cover that is adequate.
The last line - while explaining to John was, “What you must be kept in mind is that investing for a child is no different than investing for your-self. The principles remain the same”.
After dinner and before departure, Mary came and planted a kiss on one of my chick.
“Thank you, Uncle”, said the little angel, waving her hand, before getting into her father’s car.
