Save for your child's education with an endowment insurance plan

A common woe for parents is funding their children's future. One way to tackle this concern is to use the various endowment insurance options in Singapore properly.

It's expensive to raise a child here, and the financial future of your child's education is a concern for every parent. Thankfully, endowment funds are able to help alleviate this worry.

Though endowment plans can be used to plan for any life events, in this article, we will discuss some of the factors you should consider as well as your insurance savings plan options. Here's what you need to know to get started.

Start saving early

Perhaps the most important aspect of saving for your child's education is getting started early. Higher education, such as a university degree, can be substantially more expensive than Primary and Secondary School.

Saving a large sum for this expenditure can be made substantially easier by starting to save early.

It's never the right move to delay saving. Most people find it much more manageable to pay small premiums over a longer period rather than having to suddenly cough up larger sums quickly later on. Therefore, the later you start saving, the quicker you'll have to save up when you do, and the higher your premiums are likely to be.

Consider payout flexibility

Payout schedule

It's worth considering when you'll receive your payouts. Some plans provide a lump sum at policy maturity, whilst others would have multiple payout terms that can be scheduled to drop during the University years of your child. Yet others are more spread out and will start offering payouts before your child enters university.

Having the flexibility of accessing some of the payouts before or after university may help you to foot the bill for some of the associated costs, such as air tickets to attend overseas admissions interviews and accommodation costs after graduation.

Cash benefits

Some plans may include annual cash benefit withdrawals after a specified number of years. This additional payout can either be withdrawn or reinvested into the endowment plan. You may consider reinvesting your payout into the endowment plan if you intend to expend that payout toward a particular life event when the policy matures.

Plan your costs

Where and what do you expect your child to study?

The projected costs of higher education in Singapore can vary widely depending on where you'd like your child to study. Local public universities often are more affordable to study at compared to private universities or overseas studies.

For example, whilst it costs $17 900 for a Singaporean citizen to study engineering at Nanyang Technological University (NTU) in 2022, the average cost of studying engineering in Canada was $34 587 in 2022.

Furthermore, studying overseas brings with it additional costs such as flights, accommodation, and other living expenses. Another contributor to university tuition fees is what field of study your child enters. Whilst it costs just $8 200 to study arts & social sciences at the National University of Singapore (NUS), it costs more than three times more, $28 900 to study medicine at the same university.

Programme	Subsidized - SG Citizen	Subsidized - SGPR	Subsidized - International	Non-Subsidized
Arts & Social Sciences	$8 200	$11 500	$17 550	$29 850
Business	$9 600	$13 450	$20 550	$32 250
Medicine	$28 900	$41 700	$63 750	$154 600
Engineering	$8 200	$11 500	$17 550	$38 200

When do you expect your child to start university?

Generally, the cost of an undergraduate course is expected to double in the next 20 years. Education costs, particularly those of higher education institutions have been rising steadily, with education costs now 76.1 per cent higher than what they were in 2001.

That means, in theory, an undergraduate course that costs $50 000 in 2001 would cost more than $88 000 now. That time, the only year that prices decreased is in 2020. It's therefore critical to know when you expect your child to be entering university and estimate the cost of their education well in advance.

Types of endowment insurance

There are three types of endowment insurance that can be useful for saving for your child's future: traditional endowment plans and education savings plans.

Traditional endowment plans

Traditional endowment plans are the most common endowment plans, these follow a simple model, you pay premiums according to the payment option selected, and once the policy matures, you receive a payout.

One advantage of this type of endowment is that you may already have such an endowment plan, and those funds can be used for your child's education. Some traditional endowment plans allow you to withdraw cash benefits from your policy at certain terms before your plan matures and are another source of funds.

Note that this withdrawal reduces your maturity payout. Therefore, if you are planning to save up for a large expenditure once the plan has matured, it is probably best to utilise the option to reinvest the cash benefits back into the endowment plan. An example of a traditional endowment plan is Prudential's PRUActiveSaver III plan.

It is a simple endowment plan with a 10 - 30 year policy term with 100 per cent capital guaranteed upon policy maturity and no annual cash benefit. It also has several modes of payment including regular, limited and single premium options.

Educational Savings Plans

The primary attraction towards educational savings plans is their namesake specificity, education savings. This makes them an ideal option for parents looking to save for their child's future education. Often when looking for an education savings plan, parents will be able to find an assortment of different payout options.

Most often these payout terms are spaced out, with some before the plan matures and some after it matures.

An additional benefit of this type of plan is that the accompanying insurance will cover your child, though it will be up to you to compare life insurances against endowment insurances to find a combination that provides your child with the coverage you are looking for. The Tokio Marine Kidstart is an educational savings plan option.

This plan has terms that last up till your child is 20 - 23. It also features three progressive payouts in the last three years of the plan that you may withdraw. Additionally, aside from the death and total and permanent disability (TPB) benefit, the premiums of this plan are waived in the event that your child is diagnosed with autism, severe asthma, or leukaemia.

Other endowment plan features

Payment options

Payment options also vary in these endowment plans, payments are most often made either as regular, limited, or single premiums. The regular pay option is most easily understood and simply requires regular premiums to be paid throughout the plan to maturity. These plans often enjoy a lower premium per payment.

Limited pay options are similar to regular payments in that you will be required to pay a series of premiums over a period. However, the difference is that this payment period will be shorter than the duration of the plan. Last but not least is the single premium option, where you will pay a large sum once. This payment option, though available for both long and short-term plans, can have long-term savings implications.

Participating vs non-participating

A common point of concern with endowment plans is the risks associated with the plans. One contributing factor to this risk is whether your chosen plan is a participating or non-participating plan.

Participating plan

A participating plan refers to the participation of some of the premiums you pay in your insurer's investment fund. Your payout is therefore split into two categories, guaranteed and a non-guaranteed bonus.

The guaranteed portion of your payout is just that, guaranteed, you will receive that sum at your plan's maturity. However, the non-guaranteed bonus is determined by a combination of the participating fund's performance and expenses, as well as claims made on the fund.

A common practice for insurers to avoid large fluctuations in bonuses declared is to smooth the bonuses over time. The smoothing of bonuses refers to the holding back of bonuses when the performance of the fund is good so that bonuses can be maintained in less favourable times. The result is more stable bonuses that may not reflect the volatility of the investment market. In addition, often bonuses are declared annually after the first two years of the policy, and this bonus is guaranteed after the declaration.

Non-Participating Plan

A non-participating plan simply is one where all returns are guaranteed and will be received when the policy is held till maturity, though you will not benefit from any bonuses regardless of your insurer's fund performance. Naturally, though participating plans can result in greater payouts, they come with a higher risk than non-participating plans.

Creditworthiness

The financial strength of your insurer should also be a significant concern for anyone considering an endowment plan. Though different sources will disagree on the exact credit rating for different insurers, they are still a good way to establish a benchmark credit rating that you can trust with your investment. Several credit agencies that you could reference for these credit ratings are Standard & Poor, Fitch and Moody.

Summary

The needs and requirements of every parent vary greatly. Whilst education savings plans are the obvious choice, particularly if you're looking to start a new plan to save for your child's education, traditional and retirement plans can also have a place in contributing to financing the cost of education, whether directly, or by helping manage your finances and simplifying the decision making process.

Now that you know what you are looking for, it's important that you understand the features and language of endowment insurance policies so you can make the best decision for you and your child.

ALSO READ: 5 tips for saving your child's future university tuition fees

This article was first published in ValueChampion.