Education endowment for children: timing the maturity to university fees

Endowment plans are sold for one purpose more than any other: a child's education. MoneySense describes them as policies often marketed as a way to save towards a specific goal, such as school fees, over a fixed term. The design is simple, but the details that make the plan useful, the maturity date, the split between guaranteed and non-guaranteed money and the consequences of stopping early, are the ones buyers most often get wrong. This guide takes each in turn.

What an endowment is and is not

An endowment combines a small amount of life cover with a savings element that the insurer invests on your behalf. At the maturity date it pays the sum insured plus any bonuses that have built up. Most plans sold for education are participating policies, meaning bonuses depend on the performance of the insurer's participating fund and are not guaranteed until declared.

MoneySense is careful to point out that an endowment is not a deposit. Part of every premium pays for the insurance element, the rest is invested and carries investment risk, and you may get back less than you put in if you stop early. That does not make it a poor choice for education, but it does mean the plan should be bought for its structure, not mistaken for a savings account.

Timing the maturity

The point of an education endowment is that a lump sum lands when fees start. Set the maturity date against the child's expected entry to university or polytechnic, not against a round number of years. Practical points:

• Work back from the enrolment year. If the child is three and university entry is expected at around 19 or 21 depending on gender and national service, the plan needs to mature in that window. Many plans offer terms in steps, such as 6 to 15 years on Etiqa's Tiq CashSaver or 10 to 30 years on longer plans, so choose the term that lands closest to the first fee, or slightly before.
• Consider a staggered payout. Fees fall due each year for three or four years. Some plans pay yearly cash benefits during the term or in the final years; others pay one lump sum. A single sum needs to be parked somewhere safe for the later years.
• Do not forget overseas or private options. If there is any chance of an overseas degree, the target sum and the maturity timing change. It is easier to set a larger target now than to add a second plan later.
• Leave a margin. A plan maturing a year early costs little; a plan maturing a year late means borrowing or drawing on other savings.

MoneySense's own example of a goal is a fixed sum needed in five years for a daughter's education; the discipline is to name the amount and the date first and then find a plan that fits, not the other way round.

Reading the illustration

Every participating endowment comes with a policy illustration showing two scenarios. The LIA caps the upper illustration rate for Singapore-dollar policies at 4.25% a year, with the lower rate at least 1.25 percentage points below it, currently 3.00%. Both are illustrative and neither is a floor or ceiling on what the fund will earn.

Three lines in the illustration deserve attention:

1. Guaranteed maturity value. The amount you will receive at maturity regardless of bonuses. Compare this with total premiums paid. Some plans, such as Income's Gro Saver Flex Pro on yearly-paid policies held to term, state that capital is guaranteed at maturity; others do not.
2. Non-guaranteed bonuses. Reversionary bonuses, once added, become guaranteed; terminal bonuses are only paid at maturity, claim or surrender and can vary.
3. Surrender values by year. These show what you would get back if you stopped early. In the first several years they are usually well below premiums paid.

Ask what the insurer's participating fund has actually returned in recent years and how its declared bonuses have compared with the illustration.

The surrender trap

The most common way an education endowment fails is not poor returns but early surrender. A job loss or a competing expense leads to missed premiums, and the surrender value is far less than what was paid in. Two protections help: a premium term shorter than the policy term, so payments finish while the child is still young, and a payor waiver rider that keeps premiums paid if the parent dies or becomes disabled. Some plans also allow policy loans against cash value as a bridge.

Alternatives to weigh

An endowment is one way to fund fees. A term policy for the parent plus a regular investment plan is another, and for a family that already has ample life cover, simply saving into a diversified fund may deliver a similar sum with more flexibility. The endowment's advantages are the guaranteed component and the forced discipline; its disadvantages are limited liquidity and returns that depend on the participating fund. Use our comparison page to line up current plans by term, guaranteed value and premium.

Talk to an advisor

Matching a plan's maturity to a child's fee schedule, and reading the illustration against what a fund has actually paid, is work a licensed advisor does routinely. Use the portal's matching to find one who works on savings plans, or ask our assistant to explain any figure in an illustration you already have.

Sources

• MoneySense — Life insurance: Comparing term and bundled products
• MoneySense — Understanding life insurance
• LIA Singapore — Illustrated Investment Rate of Return for Par Policies
• Tiq by Etiqa — Tiq CashSaver