The purpose of term insurance (Death benefit) is to safeguard against monetary loss due to death of an earning member of the family. With the same logic, the regulator prohibits solicitation of life cover by a woman in a domestic role or a housewife. However, the same regulator allows child plans in which even a newborn can be insured. There are two questions here, Why regulator defies its fundamental definition of life insurance in child plans, and second and even stranger question, Why would a parent want life cover for her little child?
The answer to this lies in history
Juvenile insurance or Life cover (death benefit) for individuals below the age of 18 years became prominent in the western world in the 19th century. It was driven by the high infant mortality rate coupled with high funeral and burial cost. It was intended for the poorer class. It covered the monetary loss of parents for the sum of money spent on the child, the insurance money could be used to raise the next child.
Coming back to the present
This concept has reached the portfolios of HNI investors who are unnecessarily paying the cost of covering their kid’s life. This has been driven by regulator’s love for following already existing guidelines, the profitability of insurance companies, ignorance of the investors and, my personal favourite, the distributor’s greed.
Is it Prominent? Yes! Is it Relevant? Absolutely NOT!
I think, juvenile insurance, as a concept is very similar to boiling milk before drinking. It was completely required at some point in time, however totally irrelevant in today’s HNI’s context (as milk that reaches home is already pastured). Therefore Investors should consider forgetting the conventional child plans, which insures a little kid’s life, instead, they should insure their own life, which, obviously, is for the benefit of their child, that is a real child plan as it truly benefits the child! The conventional child plan with insurance defeats the purpose of investments as it grows very slowly due to high management cost. Therefore for the benefit of the child, construct a child plan by keeping insurance (for self) and investments separate, when these two objectives are clubbed together, neither insurance nor investment is achieved.
