Last year, we spoke to insurance agent Ashlyn Quah about the common mistakes made by parents in planning for their children’s education. In this follow-up piece, she addresses some questions that parents may have about education insurance.
#1 Is there a minimum amount that parents should target to set aside for their children’s education?
AQ: Because parents will not be able to predict what their children eventually choose to pursue, what insurance providers and financial planners might do is to work out a range of cash needs for both a local and an overseas education, and parents can decide the extent to which they want to provide for their children.
This is done through a detailed financial analysis based on a family’s assets, liabilities, and cash flow, to arrive at a strategy that is realistic and sustainable for a family based on their present situation. As with any goal, financial goals are not achieved with a single plan, or within days or months— small, continual steps in the right direction will get you to your target. Even if parents are only able to set aside a fraction of what is required to reach their goal, it is worthwhile to start as soon as possible, and they can review their fund allocation as their situation improves in the future.
I can’t provide an estimate of a minimum or typical nest egg as it will be different for every family, but the rule of thumb is this: For the same amount of savings, if one can make do with less flexibility or withdrawal options, and keep the money away for a longer period, the returns will logically be better.
#2 What questions should parents ask themselves when building their education nest egg?
AQ: This can be straightforward: How much do you want to put aside, and for how long? However, to be holistic in planning, we need parents to think deeper and ask themselves more difficult questions, such as:
Where do I stand in terms of my personal insurance coverage—is it sufficient to protect my existing assets, replace future income, and leave no debts?
To what extent do I want to provide for my child—full/partial funding for a local/overseas education?
At my current level of income and expenses, what can I put aside for my child’s education?
Does this meet the full extent of what I would like to provide my child with? (If the answer is no, work towards the goal in subsequent policy reviews.)
Some parents wish to fully fund their children’s education, some only wish to partially fund their children’s education, while others may expect their children to take ownership of their tertiary education by funding it through loans or paid work. One consideration is this: If parents, who have been working for many years, even decades, are unable to provide education funds, how can one expect a teenager who is still years away from full-time work to do so?
#3 To build an education nest egg, should parents look specifically at education insurance, or could general insurance or even non-insurance savings plans offer similar benefits?
AQ: There are many ways that parents can build up education funds for their children: Bank savings, investments earnings (such as bonds, shares, and unit trusts), property rental income, and insurance policies.
If parents are looking at insurance policies, they need not restrict themselves to plans catering for education needs—other wealth accumulation policies may meet the objective as well, depending on one’s investment timeframe and “risk appetite” preference. Parents can also consider three-generation or legacy planning policies, which can run for up to 100 years, allowing wealth to continue growing even after the premium term. Such policies are adaptable to changing circumstances and needs, and there is policy continuity after death, where ownership can be passed to the children.
To decide on whether your chosen method can achieve your savings objectives, bear these three factors in mind:
Profitability: What will give you a better return on your investment?
Liquidity: Will your money be accessible when needed?
Stability: Will your funds be compromised by untoward events such as death, disability, and illness?
This is a general guide to your nest egg options:
Bank savings may have liquidity and stability, but the purchasing power of our savings in the bank reduces with time due to inflation and a low interest rate. Investments and property are potentially profitable, but their liquidity and stability is a question mark: Will you be able to immediately find a buyer for your property or liquidate your investment at a profit regardless of market volatility? In the event of death, disability, or illness, would the property or investment be sold off to meet unexpected expenses instead of your child’s education needs? Insurance policies meet all three criteria: Higher returns than bank savings, funds available when you need them, and continuity in the event of a family crisis.
#4 Which insurance plans are better for an overseas education, and which plans will serve the needs of a local education?
AQ: An overseas education comes with more uncertainties in terms of the course duration, the cost, and also the currency exchange rates. What is certain is that the living expenses (accommodation, transport, food) and tuition fees are on the higher end of the spectrum, and the respective school websites may provide estimates.
The bottom line for local or overseas educational funds planning is the same: You must give time for your money to grow, and there should be enough money when you need it most. Policies that allow you to fund a local education should also be able to meet the needs of an overseas education; it boils down to you deciding on the most comfortable
commitment duration, and when or how you would like the projected maturity sum to be made available. Of course, a higher level of savings is likely to be required for an overseas education, and most insurers also have a USD currency plan that parents can consider.
#5 For those with existing education plans, how often should they review them, in case the plans have become less favourable compared to newer plans on the market?
AQ: Ideally, once or twice yearly. At the very minimum, once every two years. This is to ensure you stay aware of your own policies and take the time to fully focus on assessing your priorities and finances. Insurance providers may restructure their policies and there may be new features that are applicable to you, sometimes with an attractive premium adjustment, so it pays to be aware of the changes in the industry even when there is no change in your personal needs.
One should also reassess their policies during major life events such as a new baby or a career transition—your priorities will change with these life events and your policies should be reviewed.
From my observation, people tend not to seek out their insurance or financial advisers; perhaps they are wary that a review will be an excuse for their advisers to tout a new product, or they may have had unpleasant experiences with pushy or untrustworthy advisers. But I think it’s important that policy holders be open to regular reviews, as this is crucial to the success of one’s financial planning.