Why I Do/n’t Like Child Insurance Plans?

Child Insurance Plans by life insurance companies’ gets lot of attraction. The primary reason is that planning for your child is an emotional decision where you want all the benefits to be derived by the child even if something happens to you. Many a times you are ready to forego planning for other goals because you are aware that the child requirement cannot be delayed.  So it will always be the first priority when you have to plan for your child future.

With such an emotional attachment, it’s a fact then that investing for child is also a highly emotional decisions and that’s where child plans by insurance companies touch upon when they are selling these products. But there has been lot of debate gong around them. The insurance companies promote is as the best plan for the child while there is lot of argument which goes against it. In such a scenario it’s difficult for any parent to take a decision.

Every investment product has its characteristics but your decision should rest on whether the benefits are good enough to meet your requirements.

Here is what I like or don’t like in child insurance plans –

Why I Like Child Insurance Plans?

There are some benefits associated with child insurance plans which are difficult to neglect-

1. The Double Death Benefit– One of the most attractive feature in child plans is the double death benefit family receives. According to this feature if the policyholder dies, a Sum Assured is paid to the family during happening of the uncertain death. But insurance policy continues as all the future premiums are waived. On maturity the family receives the benefits as stated during the buying of the policy. Since apart from the maturity a death benefit equivalent to Sum Assured is paid in these plans, the feature is termed as double death benefit. For any parent this will be a more emotionally feature since it makes your child future financially secure even when you are not there.
2. Discipline: Investing with discipline is a requirement which every investor has to build in to ensure the contributions to your financial goals does not get hampered for any reason. While investing in a child insurance policy, one keeps paying the premium knowingly that it is for the benefit of the child. One of the factors which also favor this decision is high cost of exit which no parent wants to incur.
3. Riders: In child insurance plans you have riders like premium waiver or income benefit which are generally not available with other type of insurance policies. These riders are provided to ensure that the child planning do not get derail if there is any mishappening to the earning parent.
4. High Insurance– One of the main feature of child plans is that they offer high insurance coverage to cover the rising cost of child requirement.

Why I don’t Like Child Insurance Plans?

The benefits are surely appealing and no doubt it creates a lot of attraction. But there is more to these child plans which you have to take note –

1. High Cost: One of the biggest hurdle in child insurance is the cost of the product. There is high life insurance coverage, features like double death benefit and market linked investment. If you want to avail all of them then the cost increases which in turn increases the amount of contribution required.  The cost here comprises of mortality charges, risk benefit charges in some, fund management charges and others. With such a high cost the product takes a good enough time to break even.
2. Liquidity: The cost to exit early is higher. Now questions may be asked why you want to exit? What if you have ULIP and the fund does not perform to your satisfaction. When it comes to investment you will rather be more comfortable where you can easily, without incurring any cost, switch to other avenue if your existing investment is not meeting your objective.
3. Limit to Diversification: When we construct an investment portfolio the primary consideration is to diversify not only among asset classes but also within asset classes. For e.g. in mutual funds also we diversify across schemes from different companies so that we can minimize various type of risk. But when you invest in a child insurance plan then you are bound by the respective company performance. Within the company mandate you can diversify. But it’s not necessary that the respective company will outperform  in all segments or if I say one has expertise for all sectors of markets.
4. Transparency– It still an issue with insurance companies. Unlike mutual funds where they have good enough disclosures, insurance companies have many areas to address. Although, changes are being made constantly by the regulator, it has yet to reach the level of disclosures like mutual funds.
5. Time Horizon– With such a high cost associated it becomes unviable product for your child goal when you are at later stage i.e. the time horizon for requirement is less. So  If your horizon is about 6-7 years then child insurance plan will not make a good investment.
6. Returns– The child plans are of two categories – traditional and ULIPS. There has been much written about traditional plans not meeting the returns and with such features the impact of high cost on the returns will be more. The other is ULIP where you choose as per options available. Although insurance companies aim to provide enough flexibility here, the main question remains of diversifying and dependence on one company performance. What if the fund you are betting on is not able to produce the desired results-you do not have an option but to look at alternatives then. So will you consider another ULIP or will go towards mutual funds.  In such situation you have to manage your insurance funds actively to ensure you do not miss the opportunities arising.
7. Insurance Coverage– This is also one of the main highlights of child insurance plans that they are able to provide high coverage. But when you actually work out the premium outgo, the dual combination makes it too high to avail the maximum coverage. Also, the mortality charges here are higher than online term insurance. This is the reason why separating insurance and investment is considered to be more effective.
8. Higher Contributions– The problem with child plans is that if you need to have a good coverage, avail rider benefits and accumulate a good fund value,  you will have to pour in higher contributions. It’s like one in product  for all the benefits which is difficult.

There are many arguments favoring child plans but when you look at points above against outweighs them. One of the strong argument in favor has been that it is good for creating a force discipline which is true to some extent. But then you need to look at protection and accumulation separately and then see the benefit. Investment management in itself is a difficult task. In any situation these products are not made for short term not even for 6-7 years. There are frequent changes made by IRDA and it will be interesting to see how benefits in child insurance plans will evolve.  Wiser to weigh your options and then take a call.

Have you been approached for a child insurance plan? What was your analysis? Did you looked at alternatives?

Share your views…