Save for Their Future
An endowment plan is a good way to squirrel away money for your child’s future needs. SASHA GONZALES asks the experts what to look out for.
You know how important it is to save for your kids’ tertiary education. Experts say education costs have been increasing at the rate of about six per cent a year, so it’s crucial to start now. An endowment plan is a great place to start – it’s an insurance policy that provides systematic savings for a specific future goal. Here are some things to note:
Look at the policy term
Timing is important as you want the plan to pay out the money when it’s needed. Insurance firms offer flexibility when it comes to the policy term (the length of time before you get the cash payout) – anywhere from 10 to 30 years, so you can decide when you want the plan to mature.
If your child is five years old now and you think she will enter university at age 19, you may want to purchase a 14year plan. Note, however, that the shorter the policy term, the lower the returns – so if you go with a 10-year plan, your needs may not be fully met.
In this case, you may wish to get a separate monthly investment plan that will give higher returns, which you can then use to supplement the endowment plan.
Work out how much you need to save every month
Compared with your mortgage and retirement funds, your child’s education is a short-term goal. To figure out how much you need to save, look at what the cost is now, add inflation, then work backwards to arrive at how much you have to put aside, says Alfred Chia, chief executive officer of financial advisory firm Sing-capital.
A safe inflation rate to make your calculations with is 5 per cent. So, if the cost of studying for a university degree now is $50,000, and you have 15 years to save, at a 5 per cent inflation rate, you’ll need $103,946. If you can invest in a plan that provides a 5 per cent return, you will need to save $382 a month for 15 years.
Decide if you want a plan with additional benefits
Many plans offer other benefits and optional features, such as a rider to waive future premiums if you’re diagnosed with a critical illness, or a critical illness cover for you and your child, Alfred points out. But while these are good to have, they might compromise on returns.
Daniel Tan, certified financial planner Alfred Chia, chief executive officer of Singcapital, a financial advisory firm