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Buying a child plan?

Nadeem Zaidi (32), father of two — son Moosa (8) and daughter Sakina (4)—is a worried man. The sole working member in the family, with wife Gazala (28) a homemaker, has not taken any plan to financially meet the goals he has set for his children.

india Updated: Nov 13, 2009 21:28 IST
Falaknaaz Syed

Nadeem Zaidi (32), father of two — son Moosa (8) and daughter Sakina (4)—is a worried man. The sole working member in the family, with wife Gazala (28) a homemaker, has not taken any plan to financially meet the goals he has set for his children.

His agent is advising him to invest in a unit linked child insurance plan (ULCIP) which will give him lump sum amount after regular intervals.

Should he go for one? Expert advice: No!

"Most child insurance plans come with a very high cost in the initial years and low returns, be it a ULIP or a traditional child insurance plan,” said Amar Pandit, a Mumbai-based financial planner.

Child insurance plans are of two types — traditional child plans and ULCIP. In a ULCIP, insurance companies deduct various charges — mortality charge for providing life cover, premium allocation charges, policy administration charges and fund management charges —from your premium and invest only the remainder.

“In case of a traditional child insurance plan since the investments are in debt, the net returns including bonuses, at 5-6 per cent, are low,” said Surya Bhatia, a Delhi-based financial planner.

On the returns front even if the ULCIP invests in the same portfolio and duplicates the performance of a mutual fund, the return on the investors portfolio would lag to that of a mutual fund, primarily on account of the high upfront charges.

For example, if you invest Rs 1 lakh each in a mutual fund and a ULCIP that invest in the same portfolio. The fund has a
structure where there are no upfront charges are paid to the broker, while in a ULCIP the average commission paid to the agent in the first year can go as high as 30 per cent. This means only around 70 per cent of your investment gets
invested.

As a result, even if it offers the same return as that of a fund, say 20 per cent, your investment value will stand at Rs 1,20,000 in a fund compared to Rs 84,000 in a ULCIP.

Returns aside, the big mistake could be in taking life cover for the child. “Don’t buy it as a child does not need any
insurance since he has no dependants,” said Pandit.

“Insurance policies may be expensive in the short term but in the long term they are not expensive and provide good returns,” said S.B. Mathur, secretary-general, Life Insurance Council — an association of life insurance companies.