Tuesday, February 02, 2010

Endowment plan option for education fund

I was here and there discussing endowment plan, as a viable option to save up for child's education, with a few other bloggers. I had already shared my views in my previous posting here, so I would just like to substantiate with actual benefit illustrations. I would withhold the actual benefit illustrations, but will put up a summary of three companies that my very hardworking girlfriend had put up for me. She did the entire comparison herself, kudos to her!

A few key assumptions:

1. The endowment plan is bought on the life of my hypothetical kid, aged 1 on the next birthday

2. The proposer of the plan is me, aged 33 on my next birthday, non-smoker

3. The plan is bought with a rider, which waives off all future premium in the event that the proposer (aka me) kena death, TPD or CI

4. The plan has a sum assured of 30k over a duration of 20 yrs.

Okay, with the key assumptions laid out, here's the summary of the three plans that my gf had done up for me. I will mosaic the names of the three companies mentioned. If you need their names, liase with me and I'll fix you up with my gf. She's an independent financial advisor, just to sell her koyok here.


Let's just assume another thing - that the cost of university (local) in the next 20 yrs will be 50k. Actually it's more like 70k or above, but let's not debate about this for now. This is how I would plan for my kid:

1. Since I need 50k at the end of 20 yrs, I would want the endowment plan to cover 30k, or just a percentage of the full amount. Why? Because I believe that I can get a better rate than what endowment can give me, YET at the same time, I want to be sure that my child still gets the money for university IN CASE my investment sucks. I cover my downside.

2. Notice that I only look at a projected returns of only 3.75%, not any higher. On paper, you can put 5% or 10%, but if you plan with that higher projected sum in mind, AND you did not manage to get it, the consequence would be too much for me to bear. Thus, I would rather assume that the insurance companies are all sucky at investing my money. I like pleasant surprises, not shock.

3. Since I want to cover 30k of the education money with endowment plans, I only intend to look at the guaranteed part. Thus, I'm implicitly assuming that the insurance are so sucky at their investments that they give 0% projected. Worst case, I get the guaranteed amount of money (which is a losing situation due to the time value of money).

There are thus two ratios to look at:

A. Guaranteed portion / total premiums paid

B. Guaranteed portion / total returns at 3.75% projected (inclusive of guaranteed + non-guaranteed part)

The first ratio A gives me a rough guide of whether the deal is good. Screw the time value of money for now...this ratio just tells me at a glance if the amount of guaranteed money I get at maturity is more than the amount of money that I put in. Of course you'll want this ratio to be as above 100% as possible. Anything which is lower than 100%, I'll think twice.

The second ratio B gives me a indication of how safe the endowment is. If the guaranteed part takes up a higher % of the total returns projected at 3.75%, then it's safe. The company can screw up big time without affecting your plans so much.

The ratios for the 3 companies are as follows:

Company----------Ratio A------Ratio B
---A---------------103.89%------80.97%
---B---------------101.65%------76.09%
---C----------------86.61%-------62.40%

I give no shit about projected values. It's about as accurate as projecting what the weather will be like 20 yrs down the road. In my conservative plan, guaranty is king. You can complain until the cows come home that the projected yield is different from actual yield, but if the guaranteed part is 1 ct lesser than stated, you can sue the bugger until he gives you the balance.

I'm actually quite prepared to put 30k of premiums and getting 30k of guaranteed at the end of 20 yrs. Why? There's this very important feature in endowment plan that no other instrument can beat - waiver of future premiums in the event of TPD, CI, death. When shit happens and you're no longer around, how are you going to save for your kid? This waiver of premium ensures that your intention to put the child through university education is fulfilled no matter whether you're alive or not. If insurance company go belly up, then LL.

In life, I try to reduce as many variables as possible. I throw away inflation, I throw away projected yield, I throw away the market's up and down, I throw away everything except how much I want to pay and how much I'm going to get (guaranteed) at the end of 20 yrs. Life is simple when I only look at 2 variables.

I would choose company A. So that settles the 30k out of 50k planned. What about the 20k remaining? I would do it through savings, my own investments, and other sources. I'm not going to stake my entire plan on the survivability of a single company.

So how's my plan? Will work or not?

17 comments :

AK71 said...

Personally, I would just buy two endowment plans from two different insurance companies. The policies should have guaranteed portions which in total would cover 100% of the projected education expenses 20 years later. I don't have to even think about the returns I might get from my investment activities in such an instance. More predictability and less stress. My child's education. Don't play play.

One product I like is the NTUC Income Growth Policy. It has a large guaranteed portion and a small projected portion. I have recommended this to friends before. I don't have an agent per se as I usually buy online. Haha... Anyway, you might want to check if the product is still available.

You really plan ahead, LP. I'm impressed. :)

la papillion said...

Hi AK71,

Haha, yup, I do plan ahead. I like to plan during leisure time, and just cruise along my plans in auto pilot mood :)

I might do what you proposed too, seriously. Either guarantee all the 100% of the projection education fund 20 yrs down the road, or guarantee say 80%, then leave the 20% for own investment to possibly get more. Haven't think thru the exact % to do it, but the gist is already written down in the article.

I'll check out the one you told me, thanks!

Anonymous said...

Ntuc sail or growth you can buy them on 5k every year. single premium .
after 12 months full cash guareenteed ! sail can act as a annuity by drawing out bit by bit after the maurtity date . jia you ! can call me at 91505386 I not insurance agent although I have bought some insurance from predential, great eastern, uob and ntuc
from chan

la papillion said...

Hi Chan,

Thanks but nah, I don't like cash back at all, especially not for education plan.

Thanks for sharing it with me though :)

JanuskieZ said...
This comment has been removed by a blog administrator.
mm said...

HI La Pap,

Sorry been away from your blog for a long time. Hope that all is well.

Regarding that rider and your concern about the rising costs. You may want to consider just buying a Term insurance of $100K over 20 years and investing the rest.

Making 15% return a year (on average) is not difficult, if one knows what one is doing.

I don't buy any education plan for my son cos' I know I can generate better returns than the insurance company's projection.

Just my small little 2 cts :D

Cheers,
mm

la papillion said...

Hi mm,

Haha, you're master trader but I'm not! That makes all the difference :)

I don't want to bet my child's education on my own abilities to trade well. But since you're good at doing this, I think what you did is the right move :)

Createwealth8888 said...

A professional basketball player can slam-dunk a ball, we can't.

1000miles said...

Hi, Its good that you show method of evaluating endowment plan. Most financial planner don't do cos they represent one company. Independent planner would have to see how many different products can he or she show.

Thanks for info.

la papillion said...

Hi 1000 miles,

Thanks for your compliments. I do not profess that my method of analysis works for everyone but it certainly should work for me :)

As a disclaimer, I'm not a financial advisor, so this is just my own way of looking at things the layman's way, haha :)

Anonymous said...

Why not put money in a low risk to balanced investment portfolio for 20 years?

I don't think there's a point to go for the guaranteed amounts which are made up by the insurer through bonds, fixed D and low risk stuff like that anyway.

For insurance, term is dead cheap for 25 years to ensure that your kid not only has his education settled, but also all other expenses.

la papillion said...

Hi anonymous,

Are you able to be sure that after 20 yrs, the amt of money that you put in now will grow and not lose money? That's too much trust to be placed upon a low risk/balanced fund, if such a thing as low risk is present.

The thing about guaranteed amt is that you know that at the end of the maturity period, you'll get this certain sum. No other funds will give you that certainty and peace of mind. What is at the time where you're going to exit your funds, there's a bear market and all your gains for the past 20 yrs are wiped out? What are you going to say to your kids then?

Term insurance has its own use, so does whole life and endowment.

Anonymous said...

Hi la papillion,

The question is also, guaranteed by who/what? The insurer is able to guarantee precisely because it has allocated enough into safe instruments like money markets, cash equivalents, bonds etc. to build up the guaranteed amount. Look at the insurer's asset allocation in the Benefit Illustration.

In fact, if one is really so risk-averse that only such instruments are used, one would expect not only a guaranteed capital, but also some form of guaranteed return. The only reason why these endowment plans guarantee only your capital is because of high upfront charges of such policies.

For less risk-averse people, a balanced or even aggressive portfolio can be used, which of course needs to be adjusted some years before the kid goes to school, but I suppose this case will not apply to you since you are looking for security.

In the meantime, a level or even decreasing term insurance can provide cheap coverage for your child until he graduates from college, which is better than the supposedly "free" cover from endowment plans. I am not debating term vs whole life here.

Anonymous said...

Cheap coverage for child refers to insuring yourself such that in any mishap of the parent, the payout will help take care of expenses of the kid etc.

Anonymous said...

Sorry to add on again, but I think it's worth to repeat again that I'm not advocating one to take liberal risks with money meant for kid's education, but to point out that endowment plans are not as low risk as many people like to make them out to be.

There are alternatives to guaranteeing capital or even returns, without incurring exorbitant charges in form of commissions.

Also, one should consider the risk of not being able to generate enough money for the children's education in twenty years' time. I can't control increasing costs of living, tuition fees or the possibility my kid wants/needs to go overseas for studies, but what I can try to do is to manage risk in an investment porfolio for 20 years so I can get a reasonable amount of money prepared - that I can do to a significant extent at least.

Just my 2 cents, but then again I'm not looking at being a parent anytime in the near future :)

la papillion said...

Hi anonymous,

Wow, you bombarded me with your comments :) Haha!

Let me qualify my comments too. My idea is to save up for kid's education mainly by just savings. So the plan is guarantee at least the amt of money that is used to pay for the school fees. The other part I'll do active investing/trading to get the living expenses. For example, if the tuition fee is $100 and the living expenses is $50, I'll use endowment plans to guarantee as much of the $100 as possible. Endowment of course also has the non-guaranteed returns, which I will take it as a bonus. The rest of the $50 I will get it through active investing.

The point is that if my investment cannot make it, at least the fees are settled.

Actually it need not even be endowment plans, as long as the guaranteed part is fulfilled. It can be any other instruments too. As mentioned, I would aim to achieve most of the target by just pure savings alone.

But all these are just talk cock sing song too, haha :) Who knows what I might do when I really have a kid?

rina said...

Thank you for sharing such great information.It is informative, can you help me in finding out more detail on Endowment Plan