(This article appeared in Sunday Times on 19 February 2006)
BY THE time Patrick Sin's kids are ready for tertiary education in more than 10 years or so, the costs of the courses plus living expenses for four years could total about $200,000.
But the father of three is prepared. Mr Sin, a bank manager in his late 30s, uses a combination of endowment policies, unit trusts and stocks to save up for his children, aged two, eight and 10.
It pays to start early as education is going to be an increasingly expensive commodity. The $200,000 is based on a 6 per cent increase a year from the present cost of $70,000, of which $44,600 is made up of living expenses.
To protect them against his untimely death, Mr Sin has insurance policies that will provide for their education.
Mr Patrick Lim, associate director of Promiseland Independent, a financial adviser, advises parents who buy endowment policies for this purpose to take up a "rider". The rider will waive the premium payable if the policyholder dies or suffers total permanent disability or a critical illness.
Without the rider, the saving plan will be jeopardised because of the payer's loss of income.
Mr Lim also advises parents not to be swayed by projected non-guaranteed cash values of policies.
"Non-guaranteed cash values are merely projections using assumptions of high maturity bonuses and they depend on the future investment performance of the insurer,' says the independent financial adviser.
Instead of solely relying on the endowment route, there are people who invest in unit trusts and exchange traded funds.
You can invest a lump sum or put in money regularly. Mr Edwin Chew, 40, an information technology executive and a father of a six-year-old and an eight-year-old, prefers the latter.
"I save monthly and invest in unit trusts, which I think are better than endowment policies as the return on the latter is too low,'' says Mr Chew.
The Morgan Stanley Capital International's World Free Net index, which is normally a proxy for global equity unit trusts, has risen by 7.06 per cent a year on average for past 18 years. However, there were years of high volatility leading to negative returns of nearly 24 per cent in 1990 and 2002.
Parents relying on unit trusts are advised to also buy term insurance to provide for the capital in the event that they die prematurely, or suffer total and permanent disability or a critical illness.
Finally, many people increase savings in fixed deposit and saving accounts. And while the risk of losing the principal is almost non-existent, the rate of return is relatively low.
So, what does it take to accumulate $200,000 in 18 years?
High-risk, possibly low-cost strategy: Using global equity funds, you need to invest $5,305 a year, and pay $596 a year for term insurance. Total cost: $106,218. This is simply based on returns between 1988 and last year, so it's no guarantee that future performance will be exactly the same.
Low-risk, high-cost strategy: If you save up through a fixed deposit account, you will need to put aside $8,653 a year, and pay $596 a year for term insurance to cover your untimely death or diagnosis of critical illness and ensure that your child's education will still be financed. Total cost: $166,477. This is based on fixed deposit rates prevailing between 1988 and last year.
Low-risk, low-cost strategy: For an endowment policy, what you pay varies from insurer to insurer. One charges $9,348 a year for 15 years. Total cost: $140,217.This is inclusive of a rider that waives all fu! ture premiums in the event of the payer's death, total permanent disability or diagnosis of a critical illness.The policy matures with a guaranteed cash value of $200,000 to be withdrawn over a four-year installment starting from the end of the 18th year.
(The premiums for the term and endowment policies are based on payers being a 30-year-old non-smokers man, and the insured party being a female child aged one.)
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