Saving for Children’s Education Using Insurance – Why Does It Make Sense?
Most parents do not hesitate to buy insurance for their children – Life insurance, Health insurance, you name it they have it. As a financial planner, I often hear clients who are parents telling me, “I bought life insurance and health insurance for my children when they were young. I know it’s cheaper to do so when they are young and it guarantees that they are insurable.” Yet, when I discuss their children’s education planning, I get answers from both ends of the spectrum that sounds like this:
There is a price for being unprepared
A heartfelt call from one of my clients lately inspired me to write about this. The client called to check on the surrender value of his and his wife’s insurance policies, telling me that they have an intention to do so.
As I was still wondering about his reason for doing so, he explained that his daughter did exceptionally well in her ‘A’ Levels exam and will be going overseas to pursue her degree. It was then that he realised he did not plan for such a huge sum of cash which is estimated to be about $300,000. The money is needed in a few months’ time and he is now scrambling to convert their existing assets to cash.
Just like this father, the bulk of parents I meet feel that education cost should be borne by them, and do not wish to ‘gift’ their child a tuition fee loan to repay even before they start work. The last thing parents want is to deny their children the opportunity of a quality education because they are unable to afford it. The dilemma is therefore how to save up for it.
While saving in a bank is safe and guaranteed, we know that the savings need to keep up with rising university fees. On the other hand, as investment returns are not guaranteed, putting all of a child’s education fund purely into investments may not be suitable for most people.
This is where in my opinion, using insurance to fund for children’s education hits the sweet spot between the 2 abovementioned ways.
There are 3 main reasons why I think it makes a lot of sense to save up for children’s tertiary education using insurance:
1. Lower risk – because children’s education is not meant to be gambled
Every form of investment comes with risk, and common investment products such as Shares, Unit Trusts and ETFs are not capital-guaranteed. Most parents I know do not want (unpleasant) surprises when it comes to their children’s education, and this can only be achieved with an investment / savings instrument that is capital-guaranteed. Insurance products meant for savings purpose can be capital-guaranteed upon maturity.
While the returns from insurance savings plans do not have the upside potential of investment instruments, they are higher than what a typical bank savings account can yield due to the longer time horizon of the plan.
In my opinion, both professionally and personally, an insurance plan is a sensible product to use to save up for children’s education as it is lower risk than products that are not capital-guaranteed, but yet provide potentially higher yield than bank deposit accounts.
2. The savings doesn’t stop even when you have to stop
Even with the least risky way of saving for your child’s education in a bank savings account, the risk that cannot be eliminated is the risk of loss of income to the parent. In the course of my work, I gathered that one of the main financial planning concerns parents have is ‘If anything bad were to happen to me one day, will my child still be able to go through tertiary education as intended? ’ The ‘anything bad’ refers to untimely demise, disability and being struck with a serious and critical illness.
With the strategy of providing for a child’s education using bank savings or regular investments, the fund stops growing as intended should the parent be no longer able to inject new funds.
On the other hand, using insurance to save will ensure the child’s education fund is not compromised as there is insurance protection. This is a unique value of using insurance to fund for a child’s education that no other savings and investment instruments are able to do.
Let’s imagine the 2 scenarios:
Using Bank SavingsUsing Insurance (Aviva MyEduPlan with EasyPayer Premium Waiver & Payer Critical Illness Premium Waiver riders used for illustration) As in the situations illustrated above, difference in choice of savings instrument can result in very different outcomes, especially when things do not turn out as intended along the way. Savings for children’s tertiary education can be for 18 to 20 years period and insurance plans can provide the peace of mind that continuous savings can be assured throughout such a long period of time.
3. Especially relevant for sole breadwinner and single parents
Because of the protection element that an insurance plan can offer, i.e. future premiums are waived if parent passes away, gets disabled or is diagnosed with a Critical Illness, it is an especially suitable instrument for families with a sole breadwinner or single parent. This addresses the core concern every parent in such a situation has – who will take care of my child should anything happen to me.
While it is imperative for a parent in such a situation to also have a comprehensive financial plan (consisting of insurance to cover events such as Death, Disability and Critical Illnesses) done up with the help of a Financial Planner, saving up for his / her child’s education is just as important.
Thus, savings for children’s education is such situations by using insurance plans helps to kill 2 birds with one stone – saving for the child and protecting the parent.
The benefit of starting early, even if your child is still a new-born
Insurance plans meant for education funding typically requires the child to be enrolled into the plan around 10 years before the payout starts. Also, some insurance plans for education waives future premiums in the event the child is diagnosed with certain childhood medical conditions such as autism and severe asthma. Thus, the earlier you start, the more worthwhile it is for these 3 reasons:
- Potential returns may be higher as there is a longer time period for the returns to be accumulated
- Childhood medical conditions can get diagnosed at a very young age nowadays, and if so, future premiums for the education plan is waived (if the plan has coverage for such conditions)
- In case anything happens to the parent when the child is at a very young age, the child’s education in the future is already taken care of
Choosing a Suitable Plan to Get Started
Even after you decide to use insurance to save up for your child’s education, it can be mind-boggling choosing the right plan for this purpose. With a myriad of such savings plans available in the market, you may be contemplating on your purchase.
A good way to start is to understand the available plans based on when your child is expected to begin tertiary education. You can then choose a suitable plan that is designed to start paying out the education fund at the appropriate time.
Start by downloading this Guide to Education Insurance to help you select a suitable plan based on your child’s years to tertiary education.
(NOTE: Get our Guide to Education Insurance to help youselect a suitable plan based on your child’s years to tertiary education. Get your copy here)
Setting up a child’s education fund is a one-time decision, and an important one. However, if you start early and plan properly, it can be manageable and most importantly, fulfilling when you are there at the graduation ceremony!
Good luck and dream big for your child!
Article by Eileen Choo, ChFC, CLU