Children's insurance plan - what do you really need?

Before you start reading the rest of this post, I must ask you whether you have read my post Good and Bad insurance plans. If you have not, I seriously suggest that you read that before going (reading) further. Assuming that you did, let us move on.

Securing the future of your child is an important thing. And I should proudly say that this is something my fellow country-men (well at least most of whom I know) think about and do something about. That is certainly the right thing to do. How ever, I have also noticed that several of them buy insurance plans for their children with out doing the entire homework. Most often they start down the right path and deviate (or should I say attracted by marketing campaigns) towards the wrong one.

You still with me!! Good, you obviously believe in doing the right thing the right way. So, let us go over this by taking a simple example to drive the point home. You have a 5-year-old kid who would go to college at the age of 18 and let us assume that he or she would need about INR 5,00,000 (at today’s rate) for college education. You are the only earning member of your family. What if something happens to you? You, like any sensible parent should think, do not want your child’s education to go bad because of you not being there.

So you calculate how much your child would need when he/she is 18. Today’s INR 5,00,000 will not be the same when your child is 18 because of what is called as inflation in economics or financial circles. At an assumed average inflation rate of 5% and adding a buffer of say 1% (since this is an unpredictable economic parameter), you end up at about INR 11,00,000 for you child's education. So you should have a risk cover for 11,00,000 for your child’s education? May be.

“May be” because there is an alternate scenario. Suppose you have invested about INR 5,00,000, specifically for you child’s education, in a fund earning 8% per annum. You would end up with (assuming monthly compounding) a little more than INR 14,00,000 when your child turns 18. In this case, you may not need an insurance plan to take care of your child's education. Now, I am assuming that this is a fund earmarked for your child and under no circumstances you will touch it. If not, you might need insurance to take care of the risk.

On the other hand, if you have been (are) investing on a regular basis targeting the INR 11,00,000 in our example, my recommendation is to have insurance for any amount that would add to this kitty in the future. For example if you have saved INR 1,00,000 to-date and expect to add another 10,00,000 (including your contribution and returns) in the future, then you are better off buying a term insurance plan for INR 10,00,00 and make your child as the nominee.

Hope you know by now why it is important to understand what you really need. Remember that this post is intended to help you determine your need. If you are looking for what all benefits you must have in an insurance plan (children’s plan or term insurance or something else) that you buy for your child, please look for future posts. Meanwhile, please feel free to provide your comments and I will draft more examples. Till then, happy need thinking.