Sunday, November 19, 2006

What insurance you should get for your children

This is a dated but still very useful forum post from the Wall Straits Forum written by a very knowledgeable d.o.g., regarding the purchase of insurance for newborn children. Parents please read the highlights here before meeting your "financial planner".

"Children's education policies are basically renamed endowment plans...

Medical insurance for the child is an absolute must. Buy a good hospitalization and surgery (H&S) plan that offers first-dollar coverage (NO DEDUCTIBLE). Make sure it is GUARANTEED RENEWABLE. The earlier you buy it the better, before the child develops any illnesses that get excluded or the child gets denied coverage completely. H&S plans are not cheap, typically costing a few hundred dollars a year, but are well worth the cost IMHO.

The new parents would probably want to provide for their daughter in the event of an accident happening to them (the parents). So there should be sufficient coverage on the life of the mother/father that the payout will cover the cost of raising the child to a financially independent age (typically to the point of graduation from a polytechnic or university = 19/20 years of age). Even assuming a basic lifestyle, this cost will likely be in the region of $100,000-$200,000 or more.

Fortunately, term life coverage is VERY cheap. So buy enough coverage, and maybe buy 20-50% more just in case the cost of living (and education) rise too much. Again, buy term life coverage on the life of the PARENTS. Don't bother with life insurance for the child - no one is worse off financially if the child dies, so life insurance for the child is a waste of money.

A disability income policy should also be considered for the parents, as the risk of disability and partial/permanent loss in earning power is a lot higher than that for death/total permanent disability. It takes quite a bit to kill a person, a lot less to injure him/her. Especially if the parents are working in areas with higher occupational hazards... Workmen's compensation is pathetic so don't count on it...

1. H&S policy for the child (must have)
2. Term life policy for the parents (must have)
3. Disability income policy for the parents (comparatively expensive, skip if budget is too tight)
4. Optional: critical illness policy for the parents (nice to have but not absolutely necessary)

AVOID: whole life plans, endowment plans, and investment-linked policies. These are totally unsuitable for people without much disposable income. The less well off you are, the more suitable term policies are. Unfortunately, the less well off are also sometimes less well informed, and they often get sold the most unsuitable policies (read: lots of whole life and endowment policies). Do your relatives a favour and make sure they only get term policies. Anything with an investment component can wait until they get their finances in shape and can reliably save a good amount each month (10% or more of monthly income).

As for the child's education, if the family is in serious financial difficulties, they should have no trouble getting bursaries ...

Assuming the parents have spare cash to invest, endowment policies are a poor way to provide for a child's education. ..."

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