4 reasons why children’s "savings" life insurance is a nonsense
Our daughter was only a few hours old, when she first came in touch with the world of finance. She was offered a children’s "savings" life insurance right in the maternity hospital by the biggest Czech insurance company. Why did we absolutely refuse such offer?
The insurance company is one of the maternity hospital‘s sponsors and so the new mothers were asked by the hospital staff to provide the insurance company their phone numbers. Insurance agents then called the new mothers and offered them a children’s "savings" life insurance. We absolutely refused this sort of savings and here are the reasons why:
1) Investing per insurance is expensive
An insurance company takes our money, gets paid high fees and then it either passes our money on to an investment company (investment life insurance) or it valorizes it by itself and can provide us a yield similar to that of a term deposit (capital life insurance). The investment company managing our investment of course doesn’t do it for free.
The insurance company then becomes a useless and above all expensive interlink as it takes a monthly fee of tens of crowns and especially the first 12 to 24 payments cover nothing else than just the costs of the insurance company (i.e. we spend the first two years after signing the contract just by paying the insurance company and first after this period we finally begin to invest!). As a final consequence we lose at least tens of thousands crowns when we invest using a 20-year insurance.
2) We pay higher taxes for nothing
While investing in securities including mutual funds are exempt from capital gain tax, the recipients of insurance’s gain always bear a burden of 15% taxation. In addition, the children’s life insurances (unlike adults‘) cannot be deducted from the income tax base. If we then save 100.000 CZK and our capital gain equals 10.000 CZK, we must pay the tax of 1.500 CZK (i.e. 15% of 10.000 CZK).
3) Savings outside the insurance company (e.g. savings accounts or mutual funds) are usually more favorable in terms of liquidity, as we can withdraw our money at any time
Withdrawals or changes are quicker and usually there’s no need to pay monthly fees. In case of children’s life insurance you always have to pay a certain monthly amount of money, as it is a premium and non paying leads to sanctions.
4) The only meaningful reason why to choose a children’s insurance, is an alternative income in case of infavourable circumstances (injury or illness)
In case of such events, we usually don’t have our usual income, as the ill child needs our care. The risk of injury or illness can be often agreed in the parents‘ insurance contracts. The premium rates are usually the same and there’s no need to pay an extra amount for high cost "savings".
It is also advised to consider whether, in some cases (typically minor injuries), we actually need an insurance after all, as it would be sufficient to have a financial reserve for such purpose. On the other hand, for most people it is almost impossible to create a sufficient financial reserve in case of disability, so it does make sense to conclude an insurance contract.
Children’s life insurance is still alive
Children’s life insurance however remains an often used tool and there are probably several reasons for that. Parents usually don’t have all the necessary information about the options of savings and investments for their kids. In addition, these insurances are often offered in situations, where the mothers have plenty of things to do to cope with their new role in life and therefore have no energy to carefully consider their financial issues.
High fees insurance companies are paid enables them to a widespread and more aggressive marketing, and last but not least to higher bonuses for employees and brokers (compared to e.g. mutual funds or savings accounts).
How did we personally solve the issue in our family? We covered the risk of our daughter’s potential serious health complications within the parents‘ insurance contracts. The minor injuries and illnesses are not dealt with, as the mother will stay at home with the ill child in any case as long as she receives the parenting payment. Even after this period we will probably prefer having a financial reserve to an insurance. As for savings, we avoid the fees related to investment insurances and we invest directly in mutual funds.
Author of the article: Pavel Strejc, Advisor Stone & belter
