1. How much should I save for my child's education?
It depends on the amount that you can afford to set aside, and your plan for your child's education. Most parents set aside $100 a month for a child, but some save as much as $500 a month.
2. Will the saving be adequate to pay for the total cost of the university education?
If your child can be admitted to a local university, the cost is affordable and is largely subsidised by the government. The quality is among the best, by international standards.
If your child wish to or have to go overseas , there are many universities to choose from. They offer a wide range of degrees at various budget. You can find one that meets your budget and your child's interest.
Your child may be able to qualify for a scholarship. Many students can find part time work to pay for their education. Some universities offer a student loan.
You should set aside some savings for your child's education. If it cannot meet the full cost of the education, it can at least meet part of the cost. This will be helpful to your child.
3. How should I invest the savings?
You have the following choices:
* buy an endowment plan (also called an "education" plan)
* buy an investment linked plan, supplemented with decreasing term insurance
4. Should I buy an endowment plan?
Under this plan, you have to pay a fixed monthly premium for a specified number of years. The plan pays the sum assured plus bonuses, on the maturity date or on the premature death of the parent.
In today's environment, the endowment plan may give a yield of about 4% per annum (for illustration only). For a monthly saving of $150 over 18 years, the maturity sum is projected to be $52,000. This projected sum comprise of a guaranteed portion (about 80%). The remainder depends on the bonuses, which is not guaranteed.
5. Should I buy an investment linked plan?
Under this plan, you can set aside about 3% of your savings to buy a decreasing term assurance and invest the remaining 97% in an investment linked fund. This is likely to give you a higher yield.
After deducting for the cost of the decreasing term insurance and the cost of investment, the investment-linked plan (invested in a balanced fund, with moderately low risk) is likely to give 10% to 15% more than the endowment plan. This could mean $5,000 to $8,000 more for a monthly saving of $150 over 18 years.
The investment-linked plan can give a better return, as its charges are generally lower than an endowment plan.
This plan also give the flexibility to the parent as follows:
* change the monthly savings
* change the maturity date and period of savings
* withdraw the investment partially, and in stages
* stop saving for a temporary period, and make up at a later date
These changes can be done without any penalty.
6. What is the duration of the saving plan?
If you buy an endowment plan, you have to fixed the duration in advance. Most parents will take a plan to mature at a specified age for the child (say 18 years).
If you buy an investment-linked plan, you do not have to specify the duration in advance. You have the flexibility to continue the plan for as long as needed. You can also make an earlier withdrawal, partially or in full, without any penalty.
7. How much should I insure under the investment-linked plan?
You can decide on the amount of insurance. If you intend to save $150 a month over 18 years, you can insure for $32,400 (i.e. total saving for the period) under a decreasing term insurance plan. The amount payable in the event of premature death of the parent will decreasing gradually with each year. As the accumulated saving increase yearly, the total sum will most likely be higher than the payout under the endowment plan.
As the premium is so low, it is better for you to insure for a higher sum, say $50,000.
8. Can I get a higher return under the investment-linked plan?
You can invest in a global equity fund and earn a higher return over the saving period. You should choose a large, well diversified, low cost fund.
Although the fund has higher volatility (i.e. the value of the investments can fluctuate significantly at any point of time), you have the option to time your withdrawal to earn a better return.
By taking some risk, you can a higher return, say up to 20% more. This can give up to $10,000 more, for a monthly saving of $150.
9. Why does the endowment plan give a lower return?
An endowment plan give a lower return compared to an investment-linked plan for the following reasons:
* a higher amount of commission is paid to the agent
* the insurance company takes a larger share of profits
* after buying the policy, the policyholder is locked into the contract for many years
An investment-linked plan gives a better return, as the plan is transparent and flexible. The insurance company has to offer competitive terms all the time.
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