Thursday, August 28, 2008

Save for a child's education

Hi Mr Tan,
Reading your blog has been a daily thing to do for me. Thank you for all the advice, interesting info. on places you visit, hot topics and jokes.

My only insurance for my only son (9 years old) is a Life insurance for 150k. As I do not have an education plan for him, I am considering to buy the NTUC PayMyUni insurance for him. The quote is 50k for 15 years, premium at $348 monthly plus 2 riders on hospital benefit and waiver of premium based on my life.

I would like to have your advice if this is a good savings for my son's education cos the premium is quite high monthly.

Maturity return
Projected at 3.75%: $71,440
Projected at 5.25%: $81,692

The return from the above education policy is fair. It is not great, but is not bad. If you buy this policy, you should commit for the full term of 15 years.

If you invest $348 monthly to earn 5% per annum (not guaranteed) in a low cost investment fund, you will get a total of $92,300.

Read this FAQ:


Falcon said...

If I were in your shoes, I will not buy it. Twenty years ago, I bought the equivalent policy then, known as the education policy. It promises a return of over $43K projected at 5.5%. But in spite of NTUC Income making 10.7% and 10.8% the last two years, the sum at maturity is now less than $38K. I asked them how come it is less than the projected returns and was told that it does not mean that they make 10.8%, policyholders will get 10.8%. Deductions will have to be made for their profits, commissions etc. I know for a fact that after ten years there should no longer be any commissions due to the agent. All in all, it is not transparent and it is all up to them to give you. In fact, they have only given 1.3% the last year. So you see, the projected returns are useless as it is not transparent how much they will give you even they make a double digit profit. Do you think from now onwards they can make a double digit profit? Even if they do, they are giving back only 1.3%, so your projected returns are meaningless and uses only as a selling gimmick to make you sign. If I have the knowledge that I have now, I will not buy such policies and spare myself the agony over the last year in trying to get a fair deal from them.
The bottomline is this, why should we commit ourselves to pay every month to get nonsense from these companies?

zhummmeng said...

You have over insured your son.
What type of wholelife plan is he insured? If it is critical illness it is appropriate but still over insured as far his need is concerned. It has also drained off the much needed resource for his other needs.It is not properly planned by the agent.(He or she sold according to what you wanted or your plan, did they?) Insurance is not about having more the better. It is about addressing the need at a POINT IN TIME.
BTW You should consider an H&S medical plan for him.
BUT more importantly you must be adequately covered in 3 areas.
1.dependents' income replacement
2.critical illness
3.disability income
If you are NOT you are putting the cart in front of the horse.
It is understandable that you love your son. Who doesn't? Love is emotional and not financial. What good if you are not properly insured when something happens whatever insurance you have for your son is useless.Waivers are just waivers but what about the immediate needs?
As for his university funding go for pure money accumulation plan without being diluted by insurance costs by regular investing as recommended by Mr. Tan. You can begin small and increase as you go along when you are able to. It is flexible. I would recommend you the ID7 from NTUC Business centre.
Your son needs it in 12 years time and not 15. Estimated future cost for a 4 year course in a local U is $65K at inflationary rate of 6 %.
Forget all those rubbish traditional educational insurance plans. They are nothing but endowment scams , which don't help you but the insurance agents with high commission.

EagleBoy said...

Falcon: I sympathized with your situation. I bought one for my son years ago, but I will not make the same mistake again.

Zhummmeng: I also think that the plan overshoot by 3 years. Can't they shorten the plan to fit into the entry year for university?

Nobody should sell you a big shoe and expect (demand) that your feet grow to fit the size, right?

But I slightly disagree that you call those endowment plans scams. Calling something a scam is a serious matter and you should back it up with sufficient evidences. Though I have no strong affinity or affliation to these insurance companies, and things does take a different turn for the worst sometimes, don't you think it is a bit harsh to brand them as "rubbish traditional educational insurance plans"?

I recalled Mr Tan said earlier that the 15 years education plan is "okay" what is it now? Is this plan also rubbish?

EagleBoy said...

Dear Mr Tan:
If he invest $348 monthly, there is no other additional insurance to cover the unforeseen event of death, disability and dread diseases except what he owns now.
He can't possibly use all $348 to invest, can he?
If he is disabled, his own current personal insurance coverage may not even be sufficient to cover his future livelihood, much less continue the $348 monthly investment for his child. Wherein lies the balance? Pls advice. Thanks.

zhummmeng said...

Mr. Eagleboy,
the endowment takes at least 12 years to break even. If it is 15 year term, at the 14th year the return is about 2% and upon completing the term the return hits 4%.Remember it is not guaranteed. Remember the current controversy about the reshaped or restructured bonus , the special bonus or terminal bonus at the 15th year may or may not be as projected.
Regarding insurance, if the man is considering his son's need, we assume that he has ALL his needs taken care of, otherwise he shouldn't be looking at his son's.
He mustn't put the cart infront of the horse. He is the MOST important person. If something happens to him
and if he doesn't have adequate coverage all his dependents' insurance will be in trouble even though there might be some waivers of premium built into the son's insurance. What good are they if the living expense needs are a worrying problem? But if the man has adeqaute insurance the son's education funding need is already provided for and there is no need for waiver which waives premium only.
Assuming the man has all his insurance needs in place, the BEST way is to put money into a strictly money accumulator and without the insurance to dilute the return.
A regular saving plan like ID7 from NTUC is the answer, and which can give an expected return of 6-8% return easily and accumulate the fund needed at shorter time than in the dumb PayMyAgent endowment plan.
Planning is key to the success of a person's finances and not buying haphazardly from insurance salesmen who care for commission only.

Wayne said...

The IRR for the Edu Plan mentioned above ranges from 1.72% to 6.44%. Personally I think the actual IRR should be somewhere around 3% to 3.5%.

Recently I did a case study by "tearing apart" an Edu Endownment Plan into BTITR, without comprising the coverage. And based on a projected 7% p.a returns over 20 years, the NAV of BTITR is 45% better than the Edu Plan.

However, for most people who are not investment savvy enough, the tendency to take the "prescribed" route (i.e products packaged by insurance companies, except pure term insurance without cash values) is fairly high, mainly due to the lack of knowledge and self-confidence, and some are just "bo-chap", i.e do not bother to do a little more homework.


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