Many parents understand the importance of insurance and often purchase a number of insurance covers for their children. These include life insurance, health insurance, and even disability insurance in case they are unable to fend for their kids. However, most people will avoid the topic of children’s education planning once it arises. It is not uncommon to get such responses:
“I have a dedicated kid’s savings account with XXX bank that allows me to save for their future education”
“I invest my money to save up for my children’s educations since banks’ interest rates are very low”
The cost of not being prepared
A recent call from a client revealed the cost of not preparing for your child’s education. In the quick chat, the client stated that he wanted to check the surrender value of his and his wife’s insurance policies. They intended to cancel the policy before maturity.
While still trying to figure out why he would do this, he explains that her daughter did so well in her A levels exam and is going overseas to pursue her degree. It was at this point that the client realized that he had not made plans for the huge sum required (about $300,000). He needs the cash in a few months’ time and is working round the clock to liquidate their assets.
This client, like many parents, feel that they should bear the cost of education. They do not want to ‘gift’ their children a tuition loan that they would need to start repaying even before they get a well-paying job. Also, the last thing that any parent wants is to deny their child quality education just because they cannot fund it. This presents a dilemma, which is how to raise or save cash for their child’s education. Saving in a bank is a safe and sure way to fund your child’s education, but you also need to ensure that you keep up with rising university fees. Moreover, relying on investment returns is not a sure method of financing their education.
This means that it is neither suitable nor advisable to put your child’s education fund into risky investments.
So should you use insurance to save up for your children’s higher education?
1. Little to no risk: Don’t gamble with your child’s future
Almost all types of investments have some inherent risks. Common investment vehicles such as shares, ETFs or even unit trusts are not capital-guaranteed. Most parents do not want any unpleasant surprises when it comes to funding their children’s education and this can only be achieved by capital-guarantees investments. Remember, insurance products that help people save are often capital-guaranteed upon maturity.
It is also worth noting that insurance savings plans lack the potential returns of investment instruments. However, their returns are usually higher than what you can get from a bank savings account due to the longer time horizon of the plan.
In fact, an insurance plan is a great product, both personally and professionally, to save up for your child’s education since it has a lower risk than non-capital guaranteed investments. On the other hand, it offers a higher yield than the normal bank deposit.
2. With insurance, savings continue even when you stop making payments
Some parents believe that saving for their child’s education in a dedicated bank savings account is the least risky way to invest for their children’s future. However, the risk that cannot be overlooked is the loss of income to either or all parents.
‘Will my children still receive their tertiary education if anything bad were to happen to me?’. This is one of the main financial planning concerns that parents have when it comes to funding their child’s education. The ‘bad thing’ may mean a couple of things including disability, critical illnesses or even an untimely demise. In the event that any of this happens, the parent funding their child’s education using a bank saving or regular investment will no longer have the ability to inject new funds.
Using insurance, on the other hand, ensures that a child’s education fund is not compromised or interrupted due to insurance protection. This is a unique feature of using an insurance plan that you will not find with savings or even investment instruments.
Let’s look at two different scenarios:
Using Bank Savings
Assuming that you are saving $5,000 that is to be paid for 10 years. In the event that the breadwinner stops saving in the 4th year, the fund will stay the same over the remaining 6 years.
Using Insurance (Aviva MyEduPlan with EasyPayer Premium Waiver & Payer Critical Illness Premium Waiver riders used for illustration)
If you are paying annual premiums of $5,000 that is to be paid for 10 years and stop paying premiums on the 4th year, the savings continue growing even when something happens to the breadwinner. Furthermore, there is a guaranteed capital payout.
The savings instrument that you choose will result in different outcomes, as highlighted above. This is especially true when things do not go as planned. For example, losing your job will impact your ability to save and fund your child’s education. Saving for the higher education of your children can take about 18 to 20 years. While this is a long period, an insurance savings plan will offer you peace of mind while assuring you of continuous savings.
3. A great choice for single parents or a sole breadwinner
One of the main features of insurance plans is the protection element that guarantees a waiver in future premiums in the event that a parent passes away, is diagnosed with a critical illness or even gets disabled. This makes it a suitable choice for single-parent families or those with one breadwinner. It also addresses a key concern that most parents have i.e. who will take care of their children if anything happens to them.
It is important for all parents to have a comprehensive financial plan, drawn up with the help of a financial planner, that includes insurance that covers death, disability and even critical illnesses. However, it is equally important for parents to save up for their child’s education.
With such an insurance plan, the children savings plan can help to kill 2 birds with one stone, which is funding your child’s education while protecting the parent.
Benefits of early preparation, even for new-born children
Insurance plans that cater to education funding often require you to enrol your child at least ten years before they start making payouts. Other plans will waive future premiums in the event that your child is diagnosed with certain medical conditions such as asthma or autism. This means that the earlier you start the more worthy it will be for the following reasons:
Higher potential returns as there is a longer period to accumulate returns.
A waiver of future premiums in the event that your child is diagnosed with childhood medical conditions. This will, however, depend on the conditions outlined in your plan.
In the event that anything unplanned happens to the parent, the child’s education is already secured.
How to select a suitable plan
Deciding to invest in an insurance plan for your child’s education is just the start. In fact, choosing the right plan can be frustrating. With a lot of insurance savings plan in the market, you may be wondering which is the best one according to your needs and preferences.
One simple way to help you start on this journey is to review some of the available plans based on the time that you expect your child to start their tertiary education. With this information, you can select a plan that is designed to make payouts at this period.
Initiating your child’s education fund is a one-time decision but it is quite an important one. Parents who plan early and plan well often manage to give their children a good education and have a fulfilling experience at their child’s graduation ceremony.
Good luck on your investment journey. You won’t regret dreaming big for your child!