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Can childcare insurance plans really secure your child's future? - Outside View by PersonalFN

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Can childcare insurance plans really secure your child's future?
Sep 13, 2014

Becoming a parent is probably the best feeling in the world, something that perhaps can't be expressed in words. That is the reason why every parent wants to give the best to his child - be it education, lifestyle, marriage, or anything else. The thought of our children becoming helpless or stranded someday sends shivers down our spine. We always want our children to be secure, be it emotionally or financially.

Understanding this need of parents, several insurance companies have launched child care insurance plans. Most of these kind of insurance plans aim to cover expenses related to children (such as education, marriage expenses etc.), and also provide insurance cover if something unfortunate was to happen to the parents.

Now arrives the important question, can these insurance plans actually secure your child's future?

This is subjective in nature. A large number of these “childcare” insurance plans function like Unit Linked Insurance Plans (ULIPs) and some like endowment plans. Although they do provide insurance cover, the amount of coverage that they provide is generally inadequate. You see, if you are the sole bread earner of the family and have dependent children, the amount of insurance cover you take is a very important factor that will determine your family's financial security. You not only have to think about how they will meet their basic necessities (such as food, rent, electricity and telephone bills, etc.) in your absence, but also other financial goals such as children's education (both graduation and post-graduation), marriage, and so on.

Childcare insurance plans often claim that they will enable you to meet your child's future needs - such as education and marriage - as and when they become due in time. But the question is, are they effective enough to enable you to build a sufficient corpus. It is noteworthy that, these childcare insurance-cum-investment plans are rather costly as they deduct several charges from the premium you pay. Therefore, the returns that you fetch on your investments are relatively low and inadequate to meet all the expenses of your kids. You see, it is extremely important that your investments generate attractive returns so that they can combat inflation and meet your children's financial goals.

So, how can the financial goals of children be met?

Well, if you have a sufficient time horizon until the occurrence of financial goals such as children's education and marriage; you should ideally have a greater exposure to equity as an asset class. You see, over the long-term equities have displayed a quality of an effective wealth multiplier adjusting for inflation. So, the real rate of return clocked is appealing enough to plan for long-term financial goals.

While investing in equities, you could opt to invest either directly in stocks (if you possess the expertise) or invest through mutual funds (which are managed by a team of experts) and reap the benefits. However, while investing in mutual funds as well; you got to adopt prudence in order to select winning mutual funds for your portfolio. You see, plain diversified equity oriented mutual funds following a respective style of investing and / or maintaining a market capitalisation bias, may help you in the endeavour of wealth creation and providing the best to your children. But remember that as you progress towards each of the financial goals set for your children's better future, it is imperative to revisit your asset allocation pattern to optimally position your portfolio. For example, if you have already been investing in equity and a said financial goal (say your children's professional education) is just 3 years away from now, you might as well shift the corpus to a relatively safer asset class such as debt and refrain from taking a greater exposure to equity as a preventive measure to safeguard against wealth erosion in case of a downturn in equities and / or from market volatility.

As far as insurance is concerned, you as a parent must supplement your investments with an adequate term policy. Term insurance is the purest form of life insurance which provides a sum assured in case of the policy holder's unfortunate demise. Although there is only a death benefit, the premiums for a term insurance policy is substantially lower than a ULIP or an endowment plan, but the benefit is much higher. You see, it provides a large corpus at a lower cost, which can take care of finances in the absence of the bread winner. While taking a term insurance plan, consider the Human Life Value (HLV) to obtain an optimal cover.

PersonalFN is of the view that while securing your child's future, you should not get carried away by the name of any particular product. Instead, you must analyse the details of the same and check whether it can meet your financial goals. If you are unsure about how to plan and go about meeting these goals, don't hesitate to take the help of an experienced, unbiased and an independent financial planner who might help you to plan your finances prudently in a stress-free manner.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


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