As a parent we all want to provide the best to our kids and secure their future, at least financially. To fulfill this need we end up buying insurance plan for child. But does the child really need a life insurance policy, is a valid question to ask.
Before proceeding further, let’s first understand about Insurance.
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What is Life insurance Plan?
A life insurance plan is a legal contract between you ( insured ) and life insurance company ( Insurer) wherein you ( Life assured or proposer) promise to pay a certain sum periodically or one time. Simultaneously, the insurance company promises to give you a life cover (also called sum assured), investment of your money and tax benefit under section 80C.
Read more ULIP Vs Mutual Fund
Why people buy insurance Plan for child?
Before we come to any conclusions or make any remarks about why you should not acquire a child life insurance policy, let’s look at why people buy child life insurance policies in the first place.
- Secure financial future We all want to secure our children’s’ future financially. We get surety of certain amount of money at pre decided age of the child.
- Education costs: At the same time, we want to ensure that child education costs can be taken care of and that’s the reason, we buy Life insurance policies for children.
- Safe Investment: we all want to play a safe game. That is why we all invest in life insurance policies. You get almost double of the paid premium after completion of 21-30 years.
- Small easy payment options: Apart from the tax saving and other benefits, one can buy life insurance policies by paying a small amount in desirable frequency.
- Tax deduction U/S 80C : You also get tax deduction U/S 80 C for the premium paid each year.
- Maturity proceeds: The maturity amount is also tax free in nature.
Top 10 Reasons NOT To Buy Insurance Plans For Children
#1 Negative Real Rate of Return
People buy life insurance policies because of the mind set- they have to pay in smaller chunks and after a span of few years, they will get double of the paid amount. But the reality is quite different, life insurance policy return rate jumble between 5% to 6%.
This return is quite low as compared to inflation. Hence when you actually get money after few years, it seems to be a peanut. The education inflation cost rising around 10% each year and return on investment is 6%. Thus, the Purpose of investment gets defeated here.
The other better options available which provide better returns like mutual funds, post office savings such as PPF, Sukanya samriddhi Yojana and National Saving Certificate, recurring deposit etc.
#2 Financial Dependence
Insurance is for people whose families may be financially impacted by their absence. Here, I am sure that no parent would be financially dependent on his child.
Thus if you are not financially dependent on your minor child for your day today expenses, than you do not need to buy life insurance for your minor.
However, your child must be financially dependent on you. Therefore you should buy a term plan for yourself.
#3 Tax Benefit
If you buy life insurance for tax saving purpose then, there are better option available for tax saving purposes rather than buying a life insurance plan. One should always buy life insurance for life insurance ONLY. Read more about best tax saving scheme
#4 Safe Investment
Since investing in insurance policies (except ULIPs) is a safe investment option, people buy insurance policies. But quite lot of other safe investment options available for safe investment.
Read more Which is the safest investment with high returns
Top 5 post office tax saving schemes
#5 Low Surrender Value
In case you can’t pay the subsequent premium and you wish to liquidate investments. You get much lower value. Premature withdrawal is not possible.
#6 Policy lapse
In case you can’t pay the premium than your policy lapses and the benefits such as life cover and other benefits reduced proportionately.
#7 No customization
Since these plans are made for masses the policy features and other conditions can’t be customized hence the payment time, duration or amount may not suit you.
# 8 Low Insurance Cover
You get low insurance cover from these policies, thus defeating the purpose again. Some policies provide life cover for the parent and the benefits are given to children at pre determined age such as 18, 20, 22, 24 and at marriage. The part payment ( usually 20% of Sum Assured) is also quite low. Which defeats the purpose again. Low cover and low insurance cover.
Suppose your life is covered from these plans and you have 5-10 lac cover. Now think how much income you can get from this money for your child’s study and other needs.
#9 Obligated to pay
Whether you wish to pay or to stop, you have to compulsorily pay the premium for the pre decided term.
#10 Life Insurance
I am 100% sure that as a parent. nobody would like to take death claim of a child ( sorry for using such words). Thus if the policy is insuring child’s life, it is absolutely useless and costly affair for you to handle. it’s better not to buy such products.
Believe me much better avenues are available for securing your child’s future financially.
As a mother of two children, I fully understand how and why parents buy life insurance for their kids. Better not to buy and if you have already bought one, stop paying any future premiums if you are in start or middle of the term. Start a Mutual Fund SIP and buy a term plan for yourself.
Read more about best Child Education Plan
