Insuring your Child? Five Harsh Facts.

Insuring your Child? Five Harsh Facts

Have you bought or are you planning to buy an Insurance Policy for your child? Your objective is almost certainly to create a nest egg when she becomes a major or probably inculcate the habit of saving and thrift. Before you put down the first premium, check the following:

1.       Is your child earning an income?

Insurance is a substitute for economic value. If your child is not currently earning an income, he does not (sorry to say this) have any current economic value.  You may say that he has potential economic value, which only means that he has a potential insurable interest, but none now. Ergo, he need not be insured. To fulfill his potential he needs economic support, which is provided by you: you need insurance.

Of course, there are children who earn incomes: child TV stars for example. They need insurance because they represent economic value.

2.       No Risk Cover Before the age of 5, or 7 or even 8:

It is pretty difficult for an insurance company to assess risk for small children. Most insurance companies will not offer risk cover before your child is at least 5 years old. Even if you do buy a policy, you have to check if on submitting a claim, the insurance company will return the entire sum assured. Some companies may stagger the claim payout in the initial years (technically called a “lien”), or just return the premiums paid (with or without interest).

3.       Automatic Vesting:

All child policies in India have a mandatory “auto vesting” clause. What this means is that the moment the child turns 18, the policy owner (i.e. the person who purchased the policy and paid all premiums till then) loses all control over this asset. While you may argue about the pros and cons of this clause based on your current emotional situation, any clause which does not have an escape clause must be carefully evaluated.

4.       Child Policies are all savings oriented policies:

Does that tell you something? Insurance companies do not issue pure risk policies on children precisely because the following two principles are keenly followed:

·         Insurance can be sold to only those that earn an income

·         Mortality risks in children is not easy to assess

(Purists will argue that there are other reasons like inability to manage a contract and so on, but the above 2 reasons exemplify the argument).

5.       Premiums are cheaper if the age is below 18:

Many would argue that this is a positive. However consider that if your objective is not to en-cash on anything untoward happening to your child, a lower premium rate is irrelevant. If your objective is only as stated above (nest egg creation/inculcating thrift), there are possibly other ways you must explore before you buy life insurance. Life insurance as a savings tool is not always terribly efficient.

Many child insurance policies on sale today in India do not cover mortality risk of the child but are policies that are meant for adults: the child is usually the beneficiary. Since children can be the beneficiaries of almost any life insurance policy, you may want to check competing products to see if the one on offer has any specific advantage. Child Insurance policies can also be surprisingly inflexible, with some offering pre-determined money-back installment schedules based on a parent’s current view on the child’s future occupation. All child insurance is an emotional sale, and insurance company agents know that. As a person financially responsible for the wellbeing of those you care for, it is important to adequately insure yourself first.

We at www.policylitmus.com know that purchasing insurance is not an easy task, which is why we have compared over 900 products from 50 companies to make this choice easier for you.

Amit Kumar