When investing for my child's education, should I be looking at insurance or other forms of investments?

I'm considered a new parent and I have been thinking the exact same thing as you.

Investing in stocks, UT, ETFS, Robo are definitely risker and we stand a chance to lose our money if the market happens to turn bad at the exact year our kids need the money for school. One of the potential good thing about investing is you might be able to achieve a higher return. However, when it comes to investing, you need to be around to invest for your kids. What if something happens to you and you passed away. No one will be able to invest on your behalf.

As for insurance products, the drawdown is the potentially lower returns. However, you have a team of professional to invest on your behalf should you pass away. If you add a death rider, there is also no need to worry about the monthly premiums.​​​

This is more about risk management and how we plan for your child’s education based on your expectation. There are two general rules to this:

1. Investment is perceived to have a potentially higher return as compared to tools that generate guaranteed return.

2. We are unable to change the age your kid goes to college.

Investment yields non-guaranteed returns

Firstly, you are right to say that there is a risk associated with any investment. In other words, investment only yields non-guaranteed return. As a result, our investment portfolio may not reach your required goal when your kid goes to college (against Rule #2). With this in mind, we have to adopt proper risk management techniques to ensure that we fulfil Rule #1 (to gain the potentially higher return) while being protected on the downside.

What happens to the investment when you are not around?

Estate planning has always been an integral part of my career. In addition to helping my clients to draft their Will, I also create and administer Trust. By creating a trust, you can avoid the pitfall where your investment may suffer because of the lack of management when you are no longer around.

I won't get into the details of what is a trust and how to set up one (too many situations and too much details to share at one go). However, you may wish to speak to your lawyer or an estate planning practitioner like myself for professional advice.

On the other hand, you may also use a Will to achieve part of it, e.g. have a clause to sell the investment.

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What is a Will?

However, the latter (using a Will) does not come with the benefit of holding the investment (especially if it is a good investment) for the kids' education in the future.

Will planning through Insurance Companies be better?

Generally, an endowment plan is the conservative route to save for kids' education as compared to investing your money. While the returns are not exciting (as compared to investment), it gives assurance to your kids' future (which I believe is what the intention is supposed to be). With this in mind, there is no need to take on more risk than necessary to achieve this goal.

In addition to a death rider, I will strongly encourage all my clients to include coverage for critical illness too. In the event where illness strike, the insurance company will help you to save for your kids' education.

Alternatively, you may also consider a hybrid (AIA has one such product) where part of your money goes into an endowment while the other half of your money is invested. As a result, you get both sides of the return for your kid's education.

Do not stop there

If you choose the latter, do not stop at just the endowment plan itself. Moreover, you should still complete your your estate planning. At the basic level, you should do an insurance policy nomination and to draft a Will. This is simply to protect your kids' future and to skip the lengthy administrative process.

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What happens when you die without a valid Will?

All in all, discuss with your spouse on how both of you can plan and create confidence for your family's future without taking unnecessary risk. In this world, comprehensive financial planning instils confidence in your life.

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