DSIJ Mindshare

The Problem With Child ULIPs

Looking to invest for your children’s future? Do investment plans for children really offer an advantage or do regular plans serve the purpose just as well? Jay Sampat answers

After the initial euphoria surrounding the birth of a child, the next step many of us undertake is to ‘flashforward’ to his/her future. Many parents decide to buy a child-specific insurance plan to secure the wellbeing of the newest member of the family and safeguard his/her future from any undesirable events. It is hardly any wonder then that child insurance plans have been bestsellers for most life insurance companies and form an important part of their respective portfolios.

With regard to child plans, in addition to the sum assured that is paid at the time of the policyholder’s demise, future premiums are waived off and the fund value is made available to the child at maturity. Another reason why child plans score over other investment options is that one can opt for riders in order to provide for loss of income arising out of the parent’s (the insured) death or disability. Most companies also offer waiver of premium riders, which ensures that the company continues to pay the premium if the parent passes away.

Regular investments over a period of, say 15 years, will ensure that the fund grows into a substantial amount, which may not be possible in case of a one-time investment. Parents have various options to choose from, such as bank fixed deposits, Public Provident Fund (PPF), Reserve Bank of India (RBI) bonds, diversified equity mutual funds, post office instruments like Monthly Income Scheme and pure equity. Many parents invest in more than one product to secure their children’s future.

Many fund houses also offer MF schemes dedicated for children. Some of these are HDFC Children’s Gift Plan, LICMF Children’s Fund, SBI Magnum Children’s Benefit Plan and Tata Young Citizens Fund. Anyone can invest in the name of his/her child below the age of 15 years. When the child turns 18, s/he has the option of either withdrawing the money completely or doing so in a phased manner. Experts, however, are of the view that these funds are not necessarily meant for children and that they are more of a marketing ploy that fund houses adopt to attract investors. After all, even a simple equity diversified fund is capable of generating a similar performance.

While the returns from debt or income funds are fixed, they cannot generate higher returns. Historically, equity is the best performing asset. Moreover, since the children’s needs would be at least 10-15 years away, you also have enough time to weather the volatility in the market. Hence, experts advise seriously considering equity schemes while investing for your child.

Another viewpoint is that while it is convenient to invest in insurance plans, it is an expensive proposition. Financial planners are of the opinion that one should never buy an insurance policy with an investment objective in mind. They may be popular, but are complex in nature, making an analysis of their performance a difficult task.

In case of Child ULIPs, despite the cap on charges, the costs cannot be termed reasonable. Additionally, they don’t yield significantly superior returns to justify the huge charges levied. Child ULIPs are, in fact, costlier than regular ULIPs, owing to features such as waiver of premium and loss of income riders.

Thus, investing in diversified equity mutual funds with a good track record is one of the best ways to plan for your kids, as they are flexible instruments that offer an optimum mix of returns, liquidity and tax-efficiency. However, the equity component implies that they come with the associated risks. You should go for this option if you are prepared to remain in it for the long haul and digest short-term volatility.

Experts advise starting an SIP (systematic investment plan) in a diversified equity fund and staying invested over the long-term as the right approach when it comes to financially securing your child’s future. An SIP in a Large-Cap, equity diversified fund should be combined with a term insurance cover. Though there is nothing to be gained in monetary terms if you survive the tenure of the policy, you would have ensured a large sum for your child in your absence at a fraction of the cost of a ULIP.

Whether one is investing for oneself or one’s child, the principles remain the same. ULIPs have always been and will continue to be expensive as compared to term plans. Moreover, all the attractive features of death cover, disability cover and so on can be obtained from pure insurance plans designed to cover those eventualities. Additionally, the money saved by not investing in a Child ULIP can be put to better use elsewhere.

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