Cover for children

While insurance companies may want to sell child plans on the pretext of creating a corpus, the overall costs are too high to even consider such products.

Atul Sharma, 55, was a very happy man. Just recently, he had bought life insurance policies for his two grandchildren, aged two and four. "I have gifted two insurance policies to my grandsons," he proudly proclaimed.

The premium: Rs 1.5 lakh per annum for 15 years for a cover of Rs 20 lakh each. Also, both these policies came with an initial charge of around 35 per cent. Yes, the numbers are quite high. And that is because these are endowments plans. "I am investing for their future," Sharma felt.

However, just a month later, things were rather different. During his review with his financial planner, when Sharma was asked about the need to buy insurance policies for his grandchildren, he was completely stumped. The obvious set of questions were:

"Do the grandchildren have dependents?" "� You must be joking (Sharma said with a scowl)

"So why do they need insurance?" "� After 15 years they will have a corpus to start with.

"Why would you buy insurance to build a corpus?" "� 'No reply' Policies, which are sold as 'Child Plans' are mostly endowment or money back or a mixture of both, like Komal Jeevan from Life Insurance Corporation of India (LIC). Such endowment policies that are aggressively sold by companies cost between 30-60 per cent in the first year. Also, as the table shows, these policies cost between Rs 45,000 and Rs 60,000 a year. 

PREMIUMS              (Age 6)
Period (Yr)	Amount (Rs)
10	62,500
15	56,260
20	50,620
25	45,560

However, buyers should have a clear idea before buying any insurance policy. That is, they should know that basically any insurance is supposed to provide cover for a person who has dependents. So, when you buy a health policy, it's meant to pay the bills when you fall ill. And a life cover pays the family a lump sum amount in the event of the unfortunate demise of the policyholder.

By this logic, buying a cover for a child is absolutely the wrong way of going about it because the loss of the child per se (in case of an untimely death) is much more than the monetary benefit that the family will get from the insurance company. Most insurance companies sell them otherwise though. They promote these policies by saying that such policies would be like forced savings for the children's future.

However, a person who is in the shoes of Sharma can do the following. Instead of continuing with this policy for 10 or 15 years, stop paying the premium after three years and exit the product after five years. The corpus acquired by surrendering the policy would be a lump sum that can be used to invest in a good diversified mutual fund or blue chip equities.

Moral of the story: Insurance and investments are like apples and oranges addressing two very different needs. Often, consumers confuse one for the other and as a result, pay huge premiums in insurance policies.

Before you buy some policy for your young grandchildren or children for that matter, you need to do a proper assessment of their needs.

Why do they need insurance?

Do they have any liabilities?

Do they have any responsibilities?

Have you provided for their medical cover?

What are the premiums for the product being offered to you?

Obviously, answers to the first three questions would be 'No'. And that basically implies that the very young do not need any kind of insurance. Yes, many insurance agents might say that buying insurance for a young person would mean low premium, but if you were to compare the number for a four-year and a 25-year, the premiums would more or less be same for similar product. In fact, the most important policy that you should purchase is a good health cover because it is far more important than having a life insurance.

Of course, there could be special cases where one might want to look at life insurance. That is, for a special child (with specific health and support needs), you can look at policies like Jeevan Aadhar and Jeevan Vishwas from LIC.

Typically, such policies work in this manner. In case of Jeevan Aadhar, a person can buy a policy for his/her handicapped child. The premiums paid under the plan are eligible for tax relief under 80DDA of the Income Tax Act, 1961. This policy covers the life risk of the buyer and pays an annuity to the dependent in case of an untimely death.

Yes, it's true that you wish to make sure that your children have an adequate corpus for higher education, marriage and other requirements. But remember that child plans from insurance companies are no way to go about creating that corpus

The writer is director, My Financial Advisor