Our children’s future is bright and full of possibilities. If you’ve got your sights set on an endowment plan for a special milestone, be sure to take these things into consideration.
Being financially ready for the significant milestones in your children’s life usually involves saving up money over a long period of time — whether that’s to pay for university fees, a dream vacation or even a downpayment for a home.
This is where a good endowment plan comes in to help you grow your savings and make your money work a little harder to ensure your financial goal is met. Relatively predictable, low risk and comes complete with some insurance coverage, it’s easy to see why endowment plans are such a popular savings tool for parents.
What is an endowment plan?
An endowment plan is essentially a savings instrument that’s paired with insurance. Usually, the policyholder would need to make regular premium payments over a fixed duration. Once the plan matures, you’d be able to cash out and enjoy the guaranteed and non-guaranteed returns of the account value. Do note that the latter is only applicable for participating plans.
Why should I buy an endowment plan?
You’ll be hard-pressed to find an equally low-risk savings tool that not only promises guaranteed capital but is also able to grow your money with a decent rate of return. On top of that, you also get to enjoy some insurance coverage in case the worst should happen.
Nonetheless, not all endowment plans are created equal. If you’re in the endowment market for the first time, the sheer amount of information on each policy could seem overwhelming. How do you know if the plan is worth your while?
Seeing as preparing for tertiary education expenses is one of the top reasons why parents seek endowment plans, we’ve rounded up what you should be looking out for when you’re on the hunt for the best endowment plan.
Here’s what to consider when buying an endowment plan for your child
#1 Amount you need
When you buy an endowment plan, the first thing the financial advisor might ask you is how much you wish to accumulate in preparation for your milestone. For example, the tuition fees for a Business undergraduate degree course at National University of Singapore (NUS) could amount to upwards of $32,250 (without factoring in inflation). That doesn’t include other necessary expenses such as books, electronic gadgets and student housing as well.
#2 Payout age
Ideally, your endowment plan’s payout age should align with your child’s age when achieving these milestones. This ensures that the timeline and the payout is in sync. To help you ballpark, the typical age of a child to enter university is 18 years old for girls and 20 years old for boys (due to national service obligations).
Depending on your plan, the payout could also be staggered across four consecutive years — for each year at university. Typically, a traditional education-centric endowment plan will come with a premium payment term of 10 years.
#3 Rate of return
As mentioned above, an NUS Business undergraduate course costs around $32,250 in 2021. Once you factor in inflation, this figure will go up over time. You may also want to prepare for any unexpected changes.
For example, your child may opt for an overseas university instead, which typically calls for higher tuition fees. This is where the rate of return could work in your favour. As the illustrated rate of return is higher than a typical fixed deposit but has relatively lesser risk compared to investing, it could provide a nice balance for your child’s education plan — no matter which path they choose to take.
#4 Participating or non-participating plan
There’s two main types of endowments plans out there: participating or a non-participating plan. Opting for a participating plan means that your insurer will channel a portion of your premiums into a participating fund to generate returns. There’s a certain level of unpredictability here as the non-guaranteed returns depend on how well the participating fund’s investments performed.
In contrast, a non-participating fund offers significantly less risk as your returns are more or less guaranteed.
#5 Capital guaranteed
With any good endowment plan, you should at least expect to get back 100% of the money you’ve put in, A.K.A. the total premiums paid over the policy term. That way, you won’t have to worry about potentially losing your kids’ tuition. However, pocketing the capital guaranteed only comes into play once you’ve held the plan to maturity. Avoid surrendering the plan early if you can.
#6 Sum assured
The sum assured is the amount of money your child will receive once you’ve held the endowment plan to maturity. As you’re mainly looking at education plans, the payouts are typically staggered across each year at university and are a percentage of the total sum assured (eg. Year 1: 40%, Year 2: 20%, etc.).
These payouts are known as guaranteed cash benefits (GCB). In other words, the sum assured could determine your child’s GCB, death benefit or bonuses. Moreover, due to the life coverage portion that’s paired with endowment plans, you’d never have to worry about losing the sum assured should the worst happen and your child passes on.
#7 Insurance coverage
Yes, your endowment plan will come with a little protection over the course of your plan. While you will be the policy holder (as you’re the parent), your child will enjoy some life insurance while you save, with a portion of your premium payments going towards your savings as well as the insurance component.
Depending on your endowment plan, should anything happen to the life assured (your child), such as permanent disability or critical illness (knock on wood), the total insurance coverage could be 101% or 105% of the premium paid.
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