As a caring parent, you might think about starting a new investment plan for your kid who just turned 18. The same parent would also shrug off buying an insurance plan, saying their kid should afford it themselves. You are not just making one bad decision, but two.
Super cool parents do the opposite—they buy a good insurance plan for their kid and inspire them to invest on their own. There are many benefits to this reverse psychology; we shall explore them today.
If your kid turned 18, chances are they are still in college for their professional education. Rarely do 18-year olds start getting employment opportunities. They may have to wait another 4 to 5 years to get a regular job or business opportunity, and you might think that an early start in investing would do wonders when they turn 22–23.
This is where parents start contributing money, such as Rs 10,000 to their kid’s accounts and get it debited by an automated SIP every month. Sure, the Rs 10,000 SIP will grow into an Rs 8.25 lakh account in 5 years, assuming annual returns of around 12 per cent.
This might seem like a good monetary base to launch their career, but there is a slight problem. Your kid was never made responsible for the money. This money is directly debited from the parents’ account to the kid’s account, and the SIP then debits it from the kid’s account to the Mutual Fund folio. Your kid never got the chance to make progress in financial literacy. The money that went in was yours, not theirs, so they would never have the ownership of it.
Even if you started an investment pathway for your kid, it would fail to get their involvement, accountability, discipline, and imagination. So, an activity that was supposed to do good is now doing harm. Is there a solution?
The best way to handle this would be to give them the pocket money in cash or via account pay and ask them to figure out how to spend or invest it. The moment you give them money, they own it. After a while, they would figure out how to control spending and identify reasons to invest, and that’s when they take the baby steps on the journey of financial literacy.
Instead of opening an investment account for your kid, give them the pocket money and ask them to figure it out. If you have a family financial adviser, ask them to assist. But it’s a lot better if your kid can figure it out on their own.
Chances are, they might not create a portfolio worth Rs 8.25 lakh in 5 years, but their financial literacy would be just right for the opportunities ahead. They would be able to plan their finances, budgeting, and forecasting perfectly.
The other mistake parents make is to ignore taking insurance for their kids as soon as they turn 18. Logically, it does not make sense to insure as the kids are healthy and nothing could go wrong. The feeling that they should figure out how to buy insurance on their own is quite common.
Explaining why someone needs insurance is very tough. Even people in their 40s and 50s are not convinced of the need for term and health insurance. How does someone then explain to 18-year olds?
There are two variables in Insurance that you should be aware of:
1. You get insurance only if you are healthy.
2. The premiums are lower if you are young.
An insurer would cover you only if you are healthy and fit. If you have a health issue and want an insurer to cover it, it will never happen. But, the reverse is always possible: if you took out insurance while you were perfectly healthy but developed a health issue afterwards, your insurer would continue to cover it. So, the best time to buy insurance is when you are perfectly healthy.
The premiums you pay increase with age. For example, a term insurance policy for an 18-year old with a Rs 1 crore sum assured would cost close to Rs 8,000 per year, whereas a 28-year old would have to shell out around Rs 12,000 per year. If we consider the life cover to be till the age of 65, the approximate premiums paid by the 18-year old would be Rs 8000 x 47 = Rs 3.76 lakh, vs Rs 4.44 lakh (Rs 12,000 x 37) for the 28-year old.
As a parent, even if you give your kid the money to get insured, they would rarely do it. It is better to pay the premiums for the first 5 years out of your pocket and ask them to pick up the tab once they start earning.
Be the super cool parent you dreamt of—ask your kids to invest on their own, but pay for their insurance costs. This will ensure your kids will be ahead of their peers once they start earning!
The author is a research scholar in applied economics, CUSAT and NISM-certified research analyst and investment advisor.
DISCLAIMER: For term insurance, the insurer may ask for proof of income. If term insurance is not possible, the customer may have to opt for other product categories until they have a stable income. Read all insurance-related documents carefully.
The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK.