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The Best Insurance Policy for your Child

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

And the most simple and appropriate answer is - 'None'.

What is the primary objective of a life insurance policy?

The purpose of a life insurance policy is to mitigate the "financial hardship", that the family may suffer, in case of any unfortunate eventuality to the person insured.

Given this fact, let us look at two different scenarios.

Scenario 1: Insuring the child
In most cases, a child is not the breadwinner in the family. S/he does not earn any income. And, even if s/he does, the same is normally not necessary for the family to meet its daily living expenses. Typically, that is taken care of by the income earned by the parent(s).

Therefore, "insuring the child" is a meaningless and wasteful expense.

Hence, generally, one should not buy an insurance policy where the child is the "insured person".

Scenario 2: Buying the so-called "child" oriented policies
Here the objective is to protect the child's financial interests, in case something unfortunate happens to the parent.

In a typical "child" oriented policy
a. the parent takes the insurance cover
b. the child is the beneficiary
c. the maturity is designed such that the payout happens for say child's higher education or marriage
d. if, in the interim, something happens to the parent, the policy still continues without any change or break (vis-a-vis the normal policies which pay the sum insured and come to an end).

A child-oriented policy, therefore, is quite useful. If the parent dies, the child often gets an immediate payout PLUS the maturity payout as was planned earlier. So his future is well protected.

Beware: Even though useful, such child protection plans come at a steep cost. This translates into very poor returns. (By the way, even the normal non-child policies give very poor returns.) 

Most moneyback, endowment or wholelife type of policies will not yield more than 5-7% returns... at best. Therefore, it's best to avoid buying such type of plans (whether for your child or even for your family in general).

As I often say that Life Insurance Is A Terrific Concept But Terrible Product.

How should you secure your child's financial future?

So, how should you secure your child's future?

A do-it-yourself strategy makes for a much better approach:

Under this strategy,

Step 1: The parent should buy a large TERM plan for self (Note: The premium will be MUCH MUCH lower than the aforesaid child / normal policies).

Step 2: Make child the beneficiary of the above policy.

Step 3: The balance amount [= premium you would have paid for the child / normal plan minus the premium for the term plan] should be invested in pure investment products such as PPF, EPF, debt MFs, FDs, equity MFs etc. (the suitable mix depending on one's risk-appetite and time frame).

Step 4: The maturity of the term policy and various investments should be when the child's higher education or marriage is due.

The only point of difference would be that the term policy does not continue if something happens to the parent. It pays the sum insured to the child (or guardian) and the policy comes to an end.

This disadvantage is, however, more than offset by the fact that the term policy will payout a REALLY good and hefty amount of money. This can be easily be suitably invested to mature when the payout is desired.

Thus, the DIY approach will retain all the benefits of a child-oriented insurance plan and yet give a MUCH MUCH higher payout.

For additional insight, read 'Don't buy insurance for investment purposes'.

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