Is There a Best Insurance Policy For Your Child?

The Wealth Architects

I am often asked — 'Which is the best insurance policy for my child?'

And the answer — None.

The primary objective of an insurance policy is to mitigate the "financial" hardship that the family may suffer in case of any unfortunate eventuality happening to the insured. In most instances, a child is not the breadwinner in the family. Hence, "insuring the child" is meaningless and a wasteful expense. Therefore, never buy an insurance plan where the child is the insured person.

Then, there are the "child" oriented policies.

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Typically, in such policies:

a) The parent insures himself and/or herself

b) The child is the beneficiary

c) The maturity of the policy is designed such that the payout happens for say the child's higher education or marriage

d) If, in the interim, something unfortunate happens to the parent, (i) the Sum Assured is paid to the child and (ii) the policy continues without any break (the insurance company pays all the future premiums).

The child-oriented policy, therefore, is quite useful in protecting the child’s future. However, it comes at a very high-cost; which translates into poor returns.

And it is n’t flexible at all. Once bought, you are stuck with it for 10 to 20 years. You don’t have much leeway to modify your investments, if circumstances change during this long period of time (which is fairly common in today ’s dynamic world).

Therefore, a Do-It-Yourself strategy makes for a better approach.

Under this

1. The parent(s) should insure themselves with a “term plan†and high Sum Assured. The premium for such plans will be SIGNIFICANTLY lower (almost 10-20 times less) than the aforesaid child plan

2. The child, of course, is the beneficiary of the policy

3. The balance amount [equal to the premium that you would have otherwise paid for the child plan minus the premium for the term plan] can be invested in pure investment products such as PPF, EPF, gold,

FDs, equity, property, etc; which will yield comparatively much better returns. The appropriate mix would depend on your risk-appetite and time-frame so that they mature when child's higher education or marriage becomes due.

The only point of difference would be that the term policy does not continue if something happens to the parent. This disadvantage is, however, mitigated by the fact that you can buy a sufficiently large cover with a term plan as the premiums are relatively very low. As such, should any untoward incident happen, this huge amount of money received will aid in protecting the child’s future.

Thus, the DIY approach will not only retain all the benefits of a typical child oriented plan but simultaneously give a much higher payout on maturity; besides being hugely flexible.

I am sure you can devote this extra little effort to manage your own portfolio to make sure that your child gets more money...without compromising on the security aspect.

[source:http://www.moneycontrol.com/master_your_money/stocks_news_consumption.php?autono=958258]