Does Your Child Need Insurance?
For a child, there are better options to life insurance policy as an investment, but there is no alternative to health insurance.
When a child is born, parents realise that they have a big responsibility to provide well for the child. This is the time when most couples start planning for investments to support the goals that would come up in the child’s future.
Traditionally, it’s been popular to buy an insurance policy as soon as a child is born. Such policies would often be gifted by grandparents. However, with changing times, people need to understand whether these are really required.
Even with rising awareness, most people confuse the term ‘insurance’ with life insurance. Mistakenly, they often buy such policies assuming them as an investment towards the child’s higher education or marriage. They fail to realise that perhaps health insurance is a more important requirement for a child than a life insurance policy is.
There are better options to a life insurance policy as an investment, but there is no alternative to health insurance.
Let us try and understand the need for insurance policies for a child.
What is insurance?
- An instrument that provides protection against a possible eventuality.
- An arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium.
There are two critical points to the eventuality that is being described here. The event occurrence is uncertain and if it happens, the timing is uncertain. Insurance seeks to provide for loss occurring due to such eventualities. These could be illness, death, accident or some such unforeseen event.
What Life Insurance Is For
Let us consider life insurance first. When one pays a premium for a life insurance policy, the insurance company promises to pay a certain amount (sum assured, and/or bonuses) if the insured person dies during the tenure of the policy. The amount given to the nominee is compensation for the financial loss the family might face due to the death of the insured. Policies that include an investment component provide some amount in case the insured person is alive when the policy matures.
The ‘primary objective’ of life insurance is to cover financial loss due to the death of the insured person. Such a loss will arise only his or her income was necessary for the family to meet daily living expenses or achieve life goals.
Since a child does not earn, there is no question of loss of income in case of death. So insuring the child does not make sense.
Hence the primary objective of buying life insurance does not apply for a child.
Providing For Your Child’s Future
If you look at the second commonly perceived objective of an insurance policy as an investment for the child’s future, there are few points to be considered:
Will it give me money when I want it?
Most policies will have a clear timeline for payouts. Will the policy pay out money when your child is likely to need it most?
Will the amount suffice?
Higher education can be a significant expense if professional fields of study are chosen. Having an estimate of the approximate costs involved can give you an idea if the policy will be able to provide enough funds when required.
When calculating the costs of education or marriage, do not forget that inflation will significantly increase the actual amount required when your child goes to college.
Will it support my child if I die?
The policies pay out only if the premiums are paid on time. In case the premiums cannot be paid due to the death or disability of the parent, the funds may not be available as planned. Most child policies come with a premium waiver benefit that waives off the future premiums payable in case such an eventuality occurs.
What is the rate of return?
Depending on the kind of policy, the rate of returns will differ. Traditional policies like endowment or money back will have significantly lower returns as compared to equity-linked products.
Other Options To Fund A Child’s Education
In most cases, a combination of mutual funds, direct equity, public provident fund can provide a good corpus for the child’s goals, be that education or marriage. Equity and equity-oriented mutual funds are known to deliver superior returns over longer terms. They are products that beat inflation. PPF is a guaranteed, tax-free and almost negligible risk product that can help build the corpus in a stable manner.
Building a portfolio consisting of these components gives you a better chance at fulfilling the requirement of funding your child’s education as compared to a life insurance policy.
The Child’s Healthcare Costs
Healthcare requirements can arise for a child too. It can prove to be very expensive in case of hospitalisation or any major illness being detected. So, it becomes necessary to have a decent amount of health insurance cover for a child.
Most health insurance policies offer to cover a child from the age of 91 days onward, in an existing policy of a parent. Corporate employees are mostly covered in a group insurance policy provided by their company, which would also include a newborn child.
Before buying any product that promises to support any of your important life goals, like funding the education of your child, it is important to have a rational view of the products on offer. It is very easy to get swayed by the emotional pitch of the advertising. Understand your needs, do your calculations and see whether the product will stand true to its promise. Only then pick up your pen to sign on the dotted line.
Kiran Telang is a financial planner, Co-founder and Director of Dhanayush Capital Advisors and the author of ‘Mindful Retirement’.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.