Buying child insurance plans

All endowment plans, including children's plans, are non-transparent. Here's why they should be avoided

We don't believe children need insurance cover. Insurance is meant to compensate the loss of income. Since children don't earn, you don't suffer any loss of income. Insurance can't compensate the emotional loss of losing children. This is the reason why we recommend only term plans to cover the life of our readers with financial dependents.

Do not get swayed by plans in the name of children. They are is just a marketing gimmick. All endowment plans, including children's plans like Jeevan Kishore, are not very transparent. There is no disclosure of expenses or historical bonus information. You may go through annual bonus declared by other LIC endowment plans and decide yourself whether such plans make sense or not. Click the link. http://www.licindia.in/bonus_info.htm. Even bank FDs provide better returns than them. Annual bonus in some cases is even lesser than savings bank interest rate.

We do not find any reason for you to continue with a bad investment. You will lose your hard-earned money if you surrender the policy, but there is no better option before you.

Insurance should take priority over investment if you have financial dependents. And term plans help you get meaningful risk cover with a modest premium. You should look at insurance as an expense to financially secure your dependents. Investments, on the other, should be goal-based and investment options should be picked according to the investment horizon. Any long-term investment must be diversified, accumulated regularly, low cost, transparent and simple to understand, tax efficient and liquid.

You should not mix insurance with investments because you would end up buying insurance plans with investment element in them. They are costly, provide a limited cover for the premium you pay, and a substantial part of the premium goes towards investment. That is why insurance-cum-investment plans do not have most of the essential variables of a good investment.

But such plans are aggressively sold because of the high incentive paid to sell them. Resisting the aggressive sales pitch is your responsibility.

For your long term investment needs like child's higher education or seed capital, choose an equity scheme that would meet your risk profile. Choose one or two schemes and start investing in them regularly via a systematic investment plan. Link your investment with a financial goal and start transferring the money to a safer avenue two to three years prior to your goal. You do not need any special child plans to do this. invest via mutual funds. Keep your investments simple.

For insurance needs, buy a simple term insurance policy. Their premium has only insurance cover and they are the cheapest option available to buy an insurance cover.