Do You Really Need To Buy Children Education Savings Plans?
Young parents in Singapore often worry about the costs associated with raising children. The amount that you spend on school fees and tuition classes can quickly add up. On top of this, you may need to pay for art or music classes, or for the other activities in which your child shows an interest.
These expenses can prove to be a strain on the budget of every young family. But there is another aspect of your child’s upbringing that you need to consider. Every parent would like his or her child to attend university. However, tertiary education can be prohibitively expensive.
How much should you expect to pay in university fees for your child? According to a recent CNBC report, the annual tuition cost for a general arts and science degree in one of Singapore’s five major universities was between S$6,000 to S$7,000 in 2007. But this figure had jumped to S$8,000 to S$11,000 by 2016.
Singapore Management University increased its tuition costs by 50% in 10 years. National University of Singapore raised the cost of a law degree by 103% in the 2007 to 2016 period. If the top universities have hiked fees by 50% or 100% in the last decade, it is entirely reasonable to expect additional increases in the future as well.
This could be an important concern for the parents of young children. Will they be able to afford a university education for their child?
Fortunately, there could be a simple solution to this problem. A child education savings plan can provide a disciplined way to save regularly every month. Over a period, you could accumulate a significant sum that could help you to pay a substantial part, or even the whole, of your child’s university education expenses.
But what exactly is a children education savings plan and how does it work?
Features of a child education savings plan
A child education savings plan is essentially an endowment policy offered by an insurance company. This policy would pay a lump sum after a specific period, usually ten, 15, or 20 years.
So, what connection does an endowment plan have with your child’s university education? This is how it works:
⇨ You would buy an endowment plan that has specific features that are specially designed to help you to defray your child’s tertiary education costs.
⇨ The premium amount that you would pay would be a fixed monthly sum.
⇨ You could pay a premium for a period that is shorter than the term of the policy. For example, you may have to pay a monthly amount for five, ten, or 15 years, for a policy that matures in 20 years. There are also options where the premium duration is for the entire term of the policy.
⇨ At the end of the policy term, you would receive a maturity amount. Several child education policies pay the maturity amount in a staggered manner. So, for example, you could receive a lump sum at the beginning of your child’s first, second, third, and fourth years of university.
When choosing a child education savings plan, there are several factors that you need to take into consideration. These include the lump sum amount that you want to receive and the manner in which you wish to get it and the number of years for which you are willing to pay the premium.
Choosing a staggered payout may be a good idea, as it would help you to pay the yearly expenses that a university education requires.
Benefits of starting early
It may be difficult to imagine your two-year-old going off to university. But you must plan well in advance if you want to maximise the benefit that a child education plan can offer.
Let’s consider an example where you pay the insurance company a sum of S$400 every month for 20 years. That’s a total of S$96,000 (S$400 per month X 20 years X 12 months) paid over two decades. How much do you think that you will receive as a lump sum payout in 20 years?
If we assume an interest rate of 3.5% on an annual basis, you will get S$138,302 at the end of 20 years.
What if, instead of 20 years, your timeframe was ten years? How much would you have accumulated considering the same rate of interest and a similar monthly payment of S$400? Saving over a shorter period of ten years would give you a much small amount of only S$57,372.
Is buying a children education savings plan always a good idea?
In many situations, a children education savings plan can be the perfect solution for collecting the money that you will need for your child’s university education. The monthly premium amount will be deducted from your bank account on a regular basis, and the cash will be available when the university fees become due.
But does this mean that everyone who has young children should opt for a child education savings plan? According to Loy Yi Zhuo, Founding Director at Chamberwealth, this type of plan may not be suitable for everyone.
Loy explains, “These products usually have a very low death benefit and no critical illness benefits. Insurance companies keep these benefits at a minimum to lower the cost of the policy.”
But what if there is an unfortunate incident and the breadwinner in the family is no longer able to work? A child education policy would be of little help as the payout on death or terminal illness under this plan would be very small.
Although the payout on death would differ between insurers, it could be as little as, say, five times the annual premium that you are paying. So, if your monthly premium were S$400, you would get a death benefit of less than S$25,000. That’s not a very large sum.
Loy also points out that parents should look into the “… cash value of their existing policies. In fact, this cash value can be used partly to fund the child’s education ….”
Finally, the return that a child education savings plan offers is usually not very high. There are better options available in the market.
Buy a child education savings plan only if it meets your needs
Don’t jump into buying a child education savings plan without first giving it a great deal of thought. After all, you are committing for a period of 15 or 20 years.
The best approach is to conduct a thorough review of your existing savings and make an estimate of the funds that you already have. How much can this grow in two decades? You should discuss your plan with an experienced financial adviser. You may discover that you don’t need a child education policy at all.