Low Cover Value
Child plans come with an insurance component to ensure the sum payable to the child is ensured in the event of premature demise of the parent. The sum assured is usually painfully inadequate as most plans rely on a formula where the sum assured = Term * Annual premium /2. This is against expert recommendation of an amount that is 7 to 10 times the annual salary of the earning parent.
Parents should also invest on the right options, child plans offer very low yields of 5-6% although they give an element of safety. These plans compare dismally to what other investment options have delivered in the past. Equity mutual funds for instance have earned returns of 16.5% in the past decade.
Lower proportion of invested amount
Premiums paid for the child plans are divided in two; a section pays for the life cover while the other is invested in various instruments such as debt or equity. This lowers the total sum allocated to the investment. In addition, insurance companies tend to deduct a higher proportion of their premium allocation upfront, lowering the amount invested during the initial years.
Where insurance companies provide options such as; switching options, waiver of premiums etc these options come with charges that are normally deducted from the amount invested further lowering the yield. Worse still, if a parent stops the plan prematurely, they may suffer a loss.
It is recommended that parents start saving and investing early for their children’s long term goal. Parents have the task not only to invest their hard earned monies but also put in considerable effort to understand and choose the right investment vehicle. These harsh realities of child policies will help any parent when making these decisions.