Monday, July 15, 2013


(Insurance companies con you with 'child' insurance etc. The premise behind their con is that should your child die before he or she grows up, you need a payout in money terms. Are you dependant on your child for your daily living? Or is it that you want to provide for the child's need in future?) Most of the adult fraternity goes numb in the mind when it comes to the future of their children. We often become easy meat for the insurance company that sells ‘Children’s Plans”. Sentiment and emotions overcome reason and we get taken for a ride. Someone hawks a plan that says that it will provide for education of your children, marriage etc and also provide an insurance cover for them. Pause. Think. What do you need for your children? Obviously, you need enough money to provide for their education and maybe for their marriage also. Can you quantify it now? How can one quantify needs that are twenty years or ten years in to the future? Do your children need insurance on their lives now? Why pay for it now? Let us say the unspoken happens, is it a financial disaster for you? So, why waste money on insuring their lives? What we need is a savings plan. And savings plans cannot be provided efficiently by any insurance company. The insurance company invests your money in bonds or stocks or some such combination. From this they will deduct their costs and selling commissions (which are way higher than in any other instrument) and give you the balance. And if you are suckered for insurance, that money will also be lost to you. So why go for that? Simply for an emotional pull that was utterly irrational? If you put the same amount in to a recurring deposit with a bank, you will have a higher corpus. Even a liquid fund will give you a better post tax return. And you do NOT have to spend on your children’s life insurance now. So get smart. Children’s Plans being hawked are simply inefficient and result in a poor return for your money. Instead start an investment plan. And since you want to be sure about having the money without any loss of principal at the time it is needed, you have to eschew equity. If you are planning to save for your child’s college fees or something, the best way is to go about putting money aside either in a liquid fund or in a recurring deposit with a bank in the child’s name. Yes, you will get a return that would be seven or eight percent. Putting money in to bonds may not be good as there would be interest payouts and no increase in maturity value. Shares are ruled out because you cannot predict either the price or the market conditions when you need the money. Yes, the next question is how much to save? The unknown here is the amount needed for education. Education expenses are a matter of luck, the marks your child gets and the kind of college one gets in to. The amounts can vary from a meagre amount of under a lakh of rupees a year for college to a few lakhs a year. In addition there could be capitation fees if you are unlucky. The only thing predictable and possible is for you to decide on an amount that you can spare regularly to be put aside for this purpose. Of course if you are well off and earning well, you are not bothered too much about it. One mistake to be avoided is to try and stretch returns on your investments simply because your calculator tells you that there is a gap between what your savings will amount to and the amount you need at the hour of need. Someone will then tell you- Over the long run, equities will give fifteen percent, so why not put some money there? Wait a moment.. What if the market is bad at that time? I might even lose some principal. Take a piece of paper and write down the needs and the means over the time frame you have in mind. The only way out is to keep your dreams and needs within your means. If you forget this, then you will take so much risk with your money that you will find it difficult even to make ends meet. It is possible that some aspirations may have to be toned down. Get smart with your money. Do not be outsmarted by insurance salesmen and dream sellers. R. Balakrishnan

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