In the jungle of insurance, what is types of insurance are relevant to your child, and at which stage? Parenthood comes with many challenges and juggling feats, we hope this will help simplify the process of acquiring the necessary insurance for your child.
1. Prenatal Insurance
Did you know that you can buy insurance for your child before he or she is born? Pregnant mums can do this from as early as 18 weeks into their pregnancy. Prenatal insurance essentially protects you financially by paying a lump sum of ($5,000 in the case of 3 local insurers) in the event of pregnancy complications or congenital diseases when your child is born.
It also comes with hospital care benefits, which pay you $100-200+ for each day of hospitalisation. For different insurers, the coverage varies as to whether it covers the mother or the child. The limits for claim also vary.
These prenatal insurance are a way for the insurer to gain a foot into the life insurance business for your child once he or she is born, as you can extend or convert the plan into an investment-linked insurance plan and/or add in supplementary riders (eg cover for critical illness) for your child after he or she is born.
Beware though that investment-linked policies are the most expensive type of plans with the lowest coverage, and you may wish to consider a whole life insurance plan instead. The benefit however is that by extending your prenatal insurance, typically medical underwriting is not required, which means that should your newborn have certain health conditions, these will not affect his insurability with the existing insurer.
2. Whole Life Insurance
One of the gifts you can give to your child is insurance coverage from a young age. Buying a whole life insurance is primarily for protection and riders like critical illness coverage and hospital care benefits can be added on to the policy.
This means that should your child fall critically ill, become permanently disabled, terminally ill or pass away in any point of time in his or her life, the insurance policy will pay out a lump sum known as the sum assured. There are several options in the market where the sum assured is doubled or even tripled in the first few decades of your child's life.
Besides protection, whole life insurance policies also accrues 'cash value'. This means that it is a form of savings for you. Beyond a certain point, you would be able to draw out a lump sum greater than the total premiums you would have paid over the years, for any emergency contingencies.
Do note that once you have drawn the cash value out of a policy, it terminates and all protection benefits are also terminated. The compounding effect of saving for the long term is such that the savings you have accumulated jump quite substantially the longer the policy has run.
Many parents I know buy a whole life policy for their child but strike an agreement for their child to continue paying for their own policies once they start working. Besides bestowing a gift of savings and protection for your child, this teaches them financial prudence and responsibility too.
3. Endowment Policies
These are regular premium policies whose primary purpose is to save for a particular purpose over the long term. They are usually for a term of 10, 15 or 20 years. There is some protection element but the amount assured is typically low as the primary objective is to encourage savings in a disciplined manner, giving you a return higher than bank deposit rates.
Hence, if your objective is to save for your child's university education, and assuming your child is a boy and he has to undergo national service, it will be good to start on such a policy at age 11 if you are taking up a 10-year policy, at age 6 if you are taking up a 15-year policy, or at age 1 if you are taking up a 20-year policy.
A longer term is encouraged for endowment policies, as the compounding effects mean that you will have to set aside a lower amount to save monthly and also typically, your average returns are higher for a longer term chosen.
You may also wish to take up an endowment policy as a wedding gift to your child for wedding expenses or the down payment on a property. Similarly, do work backwards based on the age you expect your child to need these funds and the amount needed, accounting for inflation, at that point of time in the future. Your banker will be more than happy to work out the sums for you!
Final Note: Do consider prenatal, whole life and endowment insurances to protect your family financially against any unforeseen circumstances and as a tool for accumulating financial resources for valuable gifts like a university education, savings for a rainy day and potentially, a wedding gift.
This article first appeared in MoneySmart.
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