Last Updated on 26, November 2016
Many parents use ILP to save for children's education. I think this is a bad idea. This is why:
The ILP salesman will market ILP on children's education like this:
- Life assured on the child. The payer the parent.
- The payer can be insured against death, TPD or CI. Should the insured event occured on the payer, the premium is waived over a certain specified period.
- As the child is young, the assurance charges is cheap. So more goes into investment.
- By the time the child need to go to University, the units can be encashed to pay for the tuition fee - yet having the ILP still stay intact.
- The child enjoys protection for "life" as long as premiums are paid.
- When the child has enough income, he can increase his premium so that more goes into investment. 7. When comes to retirement, he can encash the units to fund his retirement.
- In the meantime, he enjoys protection for "life".
In other words, the ILP served as a children's education program, life time protection and retirement funding! Wow... jumbo dumbo all 3 in one product.
Sounds good? Utter nonsense. Here is what really happens:
1. The investment returns of the ILP is never guaranteed (OK, we know this). But apply this children's education program and you have a big problem. The risk involved in the volatility of the portfolio translate to a very large unknown investment value at the specify time of withdrawal.
For children's education, a huge amount of money is required (usually spread over 3 or 4 years). (This is in contrary to retirement funding. For a retirement fund, only a very small portion is withdrawn for living expenses while the bulk continues to be invested.) What will happen when there is not enough money to fund the children's education ? The only way to do is to take money from somewhere. But a children's education policy is meant to do that yet the parent still have to set aside a sinking fund to meet any shortfall? Also can we tell the child to delay his university studies so that the portfolio can grow larger?
2. Not all children wants to pay insurance for life. If there are limited paying premium whole life policy, your child if grown up to be financial savvy will blame you for bestowing on them the burden of a forever-paying-premium whole life ILP when a limited paying premium is available. Not so savvy children will just stop paying the premium when they lose interest. Parents should take this into consideration and "give" them a life insurance policy rather then giving them a burden (more on this)
3. The retirement funding sounds very attractive. But then no all the units need to be liquidated because only a very small amount is required for living expenses. Therefore a huge amount stays with the ILP product. If the person wants to transfer it to elsewhere like online portals, he need to liquidate and then pay sales charge again ($$$).
4. This has been discused a million times: The escalation charges of the ILP will force the policyholder to terminate his policy. Recently I met someone who pays $2400 annual premium for a $125,000 ILP. Based on the table of insurances charges in the policy contract, she will pay $33,000 of insurance charges at age 80!!! It sounds stupid and crazy. In this manner, the retirement funding will be wipe out just to pay for insurance. So most people will kill the plan quite early. Why then bother to buy an insurance only to kill it?
Based on the above points, one should not use ILP to fund a children's education.
Like this article? Subscribe to my newsletter below for more.