Insurance for Kids - Is it Advisable?

Recently I have come across a number of cases where people have proudly told me, while consulting for financial planning, about insurance plans they have taken for their kids, usually very young and at times just one year old. This set me thinking. What is that makes people take this totally useless step and one which goes against basic idea of Investing - that of wealth creation and that of Risk Management. Mostly, these are endowment type plans and people are just swayed by scenario shown by the friendly neighbourhood insurance agent. "Sir, my kid will get Rs.10 Lakh after 20 yrs and I am paying annual premium of Rs.25000/-. See, I will pay Rs. 5,00,000/-, that too in instalments, and get back 10 Lakh", beamed a proud father of 4 yr old. I could almost see his desire to certify that he had made a smart move. When I told him that this amounted to less than 7% rate of interest, and he would have got Rs.11,44,000/- with the same investment in a plain old PPF, his face justifiably fell.

The reasons why people do this are fairly visible. Every parent wants to do the best for his children and unscrupulous insurance agents take advantage of this weakness. The idea of creating a corpus, thereby implying richness for their kids, is simply irresistible for parents. Lack of basic financial literacy prevents them from evaluating the proposal fully. The basic idea of Insurance is to prevent or lessen the financial loss for survivors (family) in the event of unfortunate demise of the bread earner. The key word is "Bread earner", a contributor to the family kitty in some way. This is the whole idea behind Insurance, nothing less and nothing more. Then how is the death of a children, no doubt an emotional catastrophe, going to impact the financial balance of the family? So it is clear that Insurance for kids is not required at all for risk coverage because there is no (financial) risk at all.

Now comes the question of wealth creation. With more than 300 mutual funds vying for attention and having great history of performance over the years, why does one need these insurance plans for kids, beats me. It is well documented fact that over long time horizons, equity has the best characteristics of beating inflation and creating wealth. When we talk of kids, we already have long time horizons in mind. To take example of our good old sensex, markets have given about 18% growth every year (CAGR) since its inception in 1979-80. If we conservatively take only 15% (this return is there even in last 4 yrs horizon, despite the fall), the accumulated fund value for the "smart" papa in the beginning would have been approx Rs.30 lakhs. What is required is only one thing and that is discipline. Using a plain simple SIP in a combination of mutual funds having good history can give you unmatched returns and ease of mind. One may argue that one can take ULIP plans for children, after all they are also akin to mutual funds and are going to deploy the funds in Equity market only. The problem here is two-fold. One, as explained above, why you should pay mortality charges to insure someone who is not to be insured at all. This will lead to lesser funds for deployment and hence lower accumulated value. Secondly, ULIPs have a high charges structure, much lower transparency and hidden charges, especially in initial years, leading to a considerable loss of for the investor. Now with the SEBI directive of removal of entry load from mutual funds, Mutual Funds have become all the more beneficial over ULIPs.

We are somehow not attuned to the fact that most of the times simple things lead to great results. If we can take care of financial blunders that we make, we can attain our life goals very easily and in a much more stress-free manner.

Happy Investing.