27 August 2014

Endowment Plans for Child Education

DIYInsurance published an article recently comparing several Child Education Endowment Plans (see 4 Endowment Plans Specially Designed for Your Child's Education). Plans seem logical and helpful to provide the financial support for education at different points of a child's typical education profile. The scheme from NTUC offer additional supplements upon entering the first year of each level progressed. Good plans I think for those who prefer to completely outsource their financial needs (a.k.a. financially challenged?).

But the one thing that struck me was that all the plans are projected at internal rates of return of below 4%. I have also recently examined all my existing insurance plans and came to a similar conclusion as well (see Can Insurance Policies Return Better Than 4%?).

4% is also the current interest rate for CPF-SA/MA.

4% seems to be a magic number - i.e. a risk free rate.

Hard to appreciate why I would want to place my money giving return of <4% when I would probably be better of buying say the STI ETF?  For that matter, a good soccer team of SGX stocks would probably do as well (My World Cup Team (of Dividend Value Stocks). Of course, these do come with risks.


Rolf Suey said...

Hi Lizardo,
People always have a false impression that investment is risky whereas insurance-investment linked plan use the word "insurance savings etc" that give people more assurance and false impression that it is less risky. Plus some coaxing from the agents (friends and relatives etc), those financially inept will park their money with insurance agents/companies! I was one of them in the past, not anymore though!

Lizardo said...

Hi Rolf Suey,

Looks like we have had the same experiences.

But I don't blame the insurance agencies for pushing their sales. It did do some good for the poorly informed. Would have been better off than not doing anything even.

But it's such a joy to discover there is a better way. 8)

Anonymous said...

"Hard to appreciate why I would want to place my money giving return of <4% when I would probably be better of buying say the STI ETF?"

There is a reason for you to do so rather than investing in ETF. The return of ETF average about 8-10% over 10 -20 years period. The word is average, and is not "yearly". When you need money when your children hits 18 or 20, the endowment plan will provide a sure sum of money, though the return is low at 3-4%.

But if you put the money in ETF, u will not be sure you will get a reasonable sum with certainty. It depends on the market situation at that time. It also depends on your behaviour over the holding period. If u need certainty, the endowment plan is more suitable, IMO.

If u are really confident of yourself, maybe a better way is to invest a substantial amount in a better rating bonds with the rest in ETF. This will give some certainty, and possibly higher returns than the endowment plan. Else, just buy the plain vanilla education endowment plan will be good.

Just my comments.


Lizardo said...


You rightly pointed out the risk angle involved.

Retails bonds (currently limited) could well be another viable option in due course.

I noticed many insurance actually pool into an investment portfolio with 70-90% bonds. So it's probably about the same doing so DIY. And less the management fee involved.

Thanks for sharing your views.