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Words of Wisdom : "There are only two lasting bequests we can give our children... one is roots, the other wings." ~ Steven Covey

The Best Insurance Policy for your Child

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

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. In most instances, a child is not the breadwinner in the family. Hence, "insuring the child" is meaningless and waste of the premium amount.

Then, there are "child insurance" plans.

In such policies
a) the parent takes the insurance cover
b) the child is the beneficiary
c) maturity is designed so that the payout happens for child's higher education or marriage
d) if something happens to the parent, the policy still continues without any change or break.

A child insurance policy, therefore, is quite useful. 

HOWEVER, it comes at a steep cost that translates into poor returns. 

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

Under this
a) the parent should buy a large TERM plan for self (the premium will be SIGNIFICANTLY lower than the aforesaid child insurance plans)

b) make child the beneficiary

c) the balance amount [= premium you would have paid for the child plan minus the premium for the term plan] can be invested in pure investment products such as PPF, EPF, debt MFs, FDs, equity MFs etc. (mix depending on one's risk-appetite and time frame) to mature when child's higher education or marriage happens.

The only point of difference would be that the term insurance does not continue if something happens to the parent. This disadvantage is, however, taken care of by the fact that the term policy will give huge amount of money. This can be suitably invested to mature when the payout is desired.

Thus, the DIY approach will retain all the benefits of a child insurance plan and yet give a much higher payout. (Read my earlier blog 'Don't buy insurance for investment purposes' for additional insight).

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