Choosing the best education endowment plan can help Singaporean parents afford the hefty university fees their children will likely face.
Starting early when saving for your child’s tertiary education is more crucial than ever, especially with education costs set to rise to 70% of an individual’s average annual income by 2030.
Already, university fees stand at several thousands a year - annual tuition fees at NUS start at $8,050 in 2016, after grants - so tertiary education is clearly not something the average parent can expect to pay for on a whim.
One of the financial tools you can use to prepare for your child’s future education needs is an education endowment plan, which combines regular savings with an investment element to provide better returns than plain saving with a bank.
This combination results in a lump sum accumulated and grown over the endowment policy period, which is ideal for funding a tertiary education.
There are several education endowment plans available, and deciding on the right one can be difficult. Before you commit to a plan, consider the following questions.
Why Use an Education Endowment Plan?
Endowments are designed primarily for saving purposes, hence their returns are not as high. You can certainly get better returns through other instruments or channels, which you should pursue for your retirement purposes.
The one advantage endowments offer, however, is certainty. At the end of your policy period, a lump sum is guaranteed to be available.
If you try to raise the education fund through other investments, a downturn in the market might make it difficult or disadvantageous to cash out, preventing you from having the necessary funds when you need them.
When Do I Need to Start My Plan?
Because endowment plans lose money if terminated early, you should be certain of the necessity to take up a plan before you sign anything.
This is important as the funds put into an endowment could be better utilised to meet other financial goals.
Since endowment plans are available with policy terms typically ranging from 15 to 25 years, a good time to start an education endowment plan is upon the birth of your child.
Choose a 20-year term (or a policy that covers your child throughout their university years), and your endowment plan will mature just as your child is ready for higher education.
How Many Years Do I Need to Pay Premiums?
As different endowment plans offer different premium payment terms, you should choose an endowment plan most suited to your financial status and goals.
Ideally, your endowment plan should mature with sufficient funds to cover your child’s education costs. If the payout falls below what is required, you’ll have to find some way to top up the difference.
While less of a problem, if the payout exceeds the needed university fees by a significant sum, it signals that you may have incurred opportunity cost of investing in the market.
Hence, when deciding on how long you need to pay premiums for, balance your present financial ability, projected needs, and future financial goals.
A shorter premium payment period could free up your funds for other needs, but you may not be able to accumulate the needed lump sum. A longer payment period may give you more certainty of meeting the lump sum goal, but you may have to get by with restricted cashflow over a long term.
One good way to hedge against this uncertainty is to start an endowment plan for each child that comes along, when they come along.
Should I Choose Lump-sum or Split Payout?
Some endowment plans offer a one-time payment - offering you a lump sum at maturity. Others offer split payouts, which may be distributed along the policy term, or over the last few years leading up to maturity.
There are benefits to each payout scheme. For instance, if your endowment plan pays out periodically, you may be able to use the payments to work on other financial goals.
For plans that split the payouts over the last few years, you might see a higher total return, as there is opportunity for the funds not withdrawn to reap more dividends.
A plan that pays out everything at once could be ideal for families who prefer to have cash on hand.
No matter which you choose, the most important thing is to make sure there are enough funds for your child to complete their tertiary education.
What Other Benefits Should I Look Out For?
Education endowment plans don’t have to wait till your child enters university to be useful. You can look for (or request) a plan that bundles other benefits that may be helpful during your child’s growing years.
Some of these may include hospitalisation benefits, childhood disease benefits, accident coverage and etc.
You should also consider a premium waiver rider, which keeps the policy in force in case the payor (usually the parent) is unable to continue paying the premiums due to death or permanent and total disability.
Bear in mind that your insurer may be all too willing to add riders and benefits to your plan, but each addition will increase your premiums.
What Do the Projected Rates of Returns Mean?
Now, the most important thing to know about your education endowment plan - the total payout at maturity is not a guarantee, just a projection.
Only the sum listed under ‘Guaranteed Returns’ are, well, guaranteed to be paid out. On top of that, you’ll have a varying sum added, which is alluded to in the ‘Non-guaranteed Returns’ portion of the endowment plan.
(We say ‘alluded to’ because the non-guaranteed returns is a projection, which your insurer is not obligated to deliver. Seriously, they might as well include an immortal, golden-egg-laying goose in that projection.)
Don’t fret too much about that though; the purpose of an education endowment is to accrue the necessary funds, and not so much to grow your assets.
Besides, if you’re the type who would prepare early for your child’s future needs, you’re also likely to make other smart financial decisions which, taken together, should let you meet your family’s financial needs.
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By Alevin Chan
A Certified Financial Planner with a curiosity about what makes people tick, Alevin's mission is to help readers understand the psychology of money. He's also on an ongoing quest to optimise happiness and enjoyment in his life.