How to save for your child's tertiary education?

Hi folks

I was away attending to some seminars over a couple of days and thus you don't get to hear from me for the past few days. Here I'm back again.

Today, I will briefly touched on how to save money for your child's tertiary education needs.

Many parents wonder what they should to do to save for their child's future education. Here we can take a look at two popular options:-

**an education policy from an insurance company and
**a more direct investment, in a well-designed unit trust [or an investment-linked] portfolio.

Let's see the difference"

Education Policy
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An education policy is usually a combination of a growth policy and life/illness coverage. The main benefit is that the policy provides an investment vehicle - your premiums go mostly towards an investment account that will return say 4.5% - 5.5% p.a. typically with a guarantee of say 2.0 - 2.25% pa.

Another benefit is that in the event of death or permanent disability of the parent, the future premium may be waived, or parents can buy an option to waive premiums upon diagnosis of major illnesses in themselves or their children. These policies can be bought from all major insurance companies.

Unit trust [or investment-linked] portfolio
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Another approach is to build a fairly aggressive investment portfolio, suitable for a 20 year time frame. One portfolio could be a combination of funds [like the NTUC INCOME's combined funds]. This kind of portfolio would be expected to return an attractive return, taking into account the fee charged.

Which is best?
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Many people would instinctively pick an insurance policy on the assumption that it's the "safest option". But the difference in returns and expected value after 20 years can be quite dramatic, and the safest route may be to go for a direct investment - because the downside is comparable to other options yet the upside is large. Indeed insurance policies may have a very low guranteed return - a fact which is often overlooked. In insurance jargon: "the maturity amount is projected based on current bonuses that may be increased or reduced in future".

For this reason we think most parents should seriously look at unit trust [or investment-linked] portfolio. If they do consider an education policy, they must read the small print carefully.

You can make a comparison yourself i.e. putting the same amount of money in your bank savings account vs an education policy vs an unit trust[or investment-linked portfolio], you can see that latter is still the best option to consider.

In fact, young families will usually be better off with basic term life insurance to cover against the unforeseen - the susbstantially lower premiums enable them to buy better protection against loss of income or other disaster. And then remaining funds can be placed in other vehicles [e.g. investment-linked policy] that are likely to generate returns better than life insurance contracts.

This way they and their children can enjoy the best of specialists - protection from insurance companies, and investment returns from fund managers.

I would be more than happy to share with parents who are contemplating setting up an education fund for their child's future study needs.

Do feel free to drop me a note for a discussion - absolutely under no obligation!