For many parents, the gift of an education signifies the gift of a brighter future to their children. Even when faced with a limited budget, the parents I meet would often still prioritize planning for their kid’s education over other financial considerations.
Because it is of such importance to many parents, I hope to share in this article how parents can better prepare financially for their kids’ education, and what they should take note of when getting such plans.
Note: Parents, it is more important to be protected first
But, before we go into the details of endowment plans, I would like to add a special note for parents with stretched budget. I understand the desire of parents to provide for their kids; however, the priority for parents should be on getting themselves adequately covered first. The impact on kids, should anything to happen to the parents, is catastrophic.
In fact, the order of priority should go like this:
- Parents’ protection
- Kid’s protection
- Parents’ retirement
- Kid’s tertiary education
That’s right, planning for your own retirement is more important than providing for your kid’s tertiary education. This is because while your kid can still take an education loan if need be, it will be impossible for you to borrow money from the bank to fund your retirement when you are old.
Now that we have set the order right, let us take a look at what parents should know when planning for their child’s education:
University Fees Will Cost Much More
According to a 2016 CNBC report, Singapore’s university fees has risen by 38% since 2007. This works out to an inflation rate of about 4%, outpacing our general inflation rate.
Increasing operating costs
Further, university fees are projected to rise even faster due to an anticipation of a smaller cohort each year as a result of falling birth rates. Thus, it is not unrealistic for us to assume an inflation rate of 5% when projecting future university fees.
Okay, How Much More Will University Fees Cost?
Currently, the average annual course fees is approximately $10,000 per year (after government subsidies for Singapore citizens). Courses such as medicine and dentistry cost up to three times more. The university your child chooses will also affect how much the school fees cost. You can refer to the following table as a guide:
Source: Digital Senior
If your child is currently less than a year old, how much will it cost when he or she attends university 19 or 21 years later?
Assuming a current annual course fees of $10,000, the course fees for a 4-year course ($10,000 x 4 = $40,000) will become $101,078 19 years later – more than double of what it costs now.
If the numbers look astronomical, bear in mind we still have not considered the living expenses! Further, this projection is based on local university fees. If you intend to send your kids for an overseas education, the amount will be much more than this.
Wow, Where Am I Gonna Find This Money?
There are three possible options:
- Saving this amount of money
- Using endowment plans (which of course is the focus of this article)
Saving this amount of money would have been the most inefficient – I would not recommend it. You would have to save about $5,300 every year for 19 years in order to get $100K. Compare this with the endowment plan example later in the article, where only $5,400 per year for 10 years will give you approximately $100K.
Some of my clients prefer to manage their own investments for their kid’s university fees, because investment gives a higher return. But it is not without its risk. They risk not having sufficient for their kid’s university fees:
- should their investments not perform as well as they expected; or
- if the economy is in a downturn when their kids are going to university,
Otherwise, this option will indeed give us a handsome amount. Nonetheless, some of my clients are not prepared for this outcome and still chose an endowment plan for its certainty, while some decided to complement their investments with an endowment plan.
The third option is by using endowment plans. Endowment plans can be explained simply by the following graphic:
Such plans typically give a return of about 2-4%. Let’s look at the following example for more details about education endowment plans.
Are All Education Endowment Plans the Same?
No. Some give you an inferior return – don’t throw your money away!
And just how much can the returns differ?
We have Jamie, a first-time dad who is anxious to plan for his newborn. He was recommended an endowment plan at a roadshow and bought it immediately. The plan required him to pay $5,429.90 per year for 10 years. He has the option to withdraw some money every year or collect a lump sum of $88,719 at maturity 20 years later (presented as Jamie’s Endowment in the following table).
Sometime later, he met a financial planner and learnt that there are other endowment plans with an even higher return:
Dang!! Jamie could would have gotten $99,508, or $11,000 more with Company A’s endowment plan, in spite of him paying about the same amount of money! Just how upsetting is that? Don’t be like Jamie, remember to compare and get one with the highest return!
Choose The Right Type of Endowment Plan
There are many types of endowment plans in the market from different insurers. How do you know which ones to get? Some offer:
- Different premium terms – pay throughout the term or limited premium term of 5, 10, 15 years. It is adjustable and will depend on the required amount at maturity and your budget. In general, plans with shorter premium years have a higher return.
- Different maturity years – would you like the plan to mature before your kid enters university or after your kid finishes university? Both have its benefits.
- Different payout structure – some offer a pay out every year while others pay out at maturity or near maturity. Endowment plans that pay out at/near maturity give a higher return and are more suitable as an education endowment because we only need the money when our kid enters university.
Ultimately the combination to get will depend on your need. We should also consider one that gives us the highest return.
If you find it confusing to sieve through the endowment plans and would like someone to explain to you, I will be happy to to do so. To find out how much your child needs and which endowment plan is the best for your situation, feel free to drop me a note here. Remember to do your comparison and check before committing to a plan! Buying an unsuitable plan and surrendering it before maturity will cause you to lose money.
Note: Author is a financial planner with one of the largest independent financial advisory firm that partners with most of the insurers in Singapore.