As you may have already known about the tertiary education fees in Singapore from one of our previous articles, raising kids in Singapore is extremely costly, and education is one of the most expensive parts of raising a kid. University fees cost several thousands annually and tertiary education fees are not something that every parent can afford to pay easily.
In order to plan for your future family’s finances and your future child’s education, you can start saving – through investments and insurance. One such financial tool to help you with your child’s education is an education endowment plan. The education endowment plan is a savings plan that comes with an investment element. This provides better returns than regular savings plans in banks.
With the education endowment plan, you will set aside a certain amount of money to save every month, and over a period of time, your principal amount will grow together with an interest, which can be used to fund your child’s tertiary education.
There are many education endowment plans available in the market, and it may be difficult for you to choose the right one for your child. Before getting an education endowment plan for your child, you may consider the following questions. Otherwise, you may also make an appointment with Jaeo Finance to help you choose the right plan.
Are education endowment plans for insurance or investment?
Although their main purpose is for insurance and saving purposes, there is an investment element attached to them. Since investment is secondary, the returns are not as high. If your main purpose is investment, there are other channels that can yield better returns in the market.
Education endowment plans come with life insurance. However, unlike whole life insurance, you only need to pay premiums for a part of the policy period and not throughout.
One benefit of all endowment plans is that you are guaranteed to receive a lump sum at the end of your policy period.
How to choose the right education endowment plan for your child’s tertiary education?
What is your purpose?
Is your purpose to save up for your child’s tertiary education or is it just to get insurance for your child? If it’s merely for protection of your child, you can just take up a term insurance plan. However, if it’s to save up for your child’s education, you, education endowment plans are recommended for you and your child’s future.
When should you get your education endowment plan?
Just like any other endowment plans, you will lose all your money if you terminate early. Therefore, you must be certain of yourself that you are willing to set aside a certain amount for your endowment plan every month till the plan matures.
Endowment plans are typically range from 15 to 25 years. Therefore, it is recommended to buy an education endowment plan upon the birth of your child, and get a 20-year policy. Your education endowment plan will mature just as your child is ready to enter a university.
How many years of premiums should you pay?
Different education endowment plans offer different premium payment terms and you should choose the one that is the most suitable for your financial status and goals. The ideal situation would be that your education endowment plan matures as your child is about to enter university with sufficient funds to cover the education fees.
If the payout falls below the education fees, you will have to find ways to top up the difference. However, if the payout exceeds your child’s university fees significantly, it shows that you might have incurred some opportunity cost of investing your money elsewhere.
When you are making a decision on how long to pay premiums for, you have consider your current financial status, your child’s age and future financial objectives.
With a shorter premium payment term, you may be able to free up your funds for other needs. However, you may not be able to accumulate enough sum and may not be able to achieve the financial goals for your child’s education needs. On the other hand, with a longer premium payment term, there is more certainty to achieve the financial goals for your child’s education needs, but you may have to get by with a restricted cashflow over a long term.
Payout frequency – lump-sum or split payout?
There are two types of payouts for education endowment plans.
- Lump-sum – A one-time payment given out at maturity. This is ideal for those who already have firm financial plans and know when they want the payout for their child’s education fees.
- Split payout – Payouts are distributed along the policy term, or over the last few years leading up to maturity. You may be able to use the payouts to work towards other financial goals. For education endowment plans with split payouts over the last few years during the policy term, there might be a higher return as funds not withdrawn have a higher chance of reaping more dividends.
Projected rates of return
When you buy an education endowment plan for you child, there are 2 most important things to look out for – guaranteed returns and non-guaranteed returns. You are only guaranteed to receive the sum listed under ‘Guaranteed Returns’. In addition to the guaranteed returns, you will receive a varying amount which is the sum from ‘Non-guaranteed Returns’.
However, since education endowment plans are meant for saving up for your child’s tertiary education and not to grow your assets, you should not be too concerned about non-guaranteed returns.
Other benefits to look out for
While you are waiting for your education endowment plan to mature, you can look out for other plans that may be beneficial to your child before he/she enters university.
Such benefits may include hospitalisation benefits, childhood disease benefits, accident coverage etc.
You can also consider adding a premium waiver rider to your education endowment plan. The rider keeps the policy in force in the event of death or permanent disability of the payor (usually the parent). However, bear in mind that adding benefits and riders to your education endowment plan will increase your premiums.
If you need any assistance on planning for your child’s education, feel free to reach out to us!