Endowment versus ILPs for Education Fund

Over at another blog, we had a discussion on the chatbox whether an endowment or an ILP would serve better as an education fund for our children. I personally chose an ILP to save for my child's education so I will be harping on all the good points about it here. Nevertheless, I will try my best to give a fair comparison in this piece.

An endowment policy and ILP are quite different in nature.

An endowment basically provides coverage / insurance protection only for a term (e.g. 20 years) and gives back money at maturity. This maturity cash amount comprises guaranteed and non-guaranteed components.

An investment-link plan (ILP) provides lifelong coverage (up to age 99 years actually) and also allows you to draw out money as long as you leave a certain minimum sum within. There are NO guaranteed components.

As a basis for comparison, I have chosen to look at the following factors (these were actually the considerations I had when I decided to get an ILP over an endowment):

1. Protection. In terms of protection, an ILP trumps the endowment hands down. For the same amount of premiums, I can get a much higher protection for death, TPD and critical illness for my child. In addition, while the endowment protection amount is fixed throughout the policy term, you can vary the protection requirements for the ILP.

2. Premiums. When I look at premiums wise, an endowment actually allows you to pay lesser in terms of premiums because most (if not all) ILPs require a minimum $100 per month in premiums. Of course, we know that saving $100 per month for your child's education would most probably be never enough to afford a university education 18 to 21 years down the road.

3. Waiver of premiums. Nothing to compare. Both plans allow riders to waive future premiums should both parents become critically ill, die or get TPD.

4. Premium Holiday. This is something that was important to me. If I am not able to afford the premiums due to a change in job, etc, I needed the flexibility to go on a premium holiday. An endowment does not allow that (correct me if I am wrong). For endowment, the premium holiday period is treated like a policy loan on the existing cash value. This interest can range around 6% interest.

5. Emergency Withdrawal of Cash. The ILP allows me to draw out money from it as long as a certain minimum sum inside (usually $1000). For an endowment, withdrawal of cash before maturation of policy is considered a policy loan (at the interest rate of around 6%).

6. Returns. The endowment will give GUARANTEED plus NON-GUARANTEED returns whereas the ILP only gives NON-GUARANTEED returns. In illustrations, the ILP always shows higher absolute returns because of the 5% or 9% returns showed compared to the endowment 3.25% or 5.25%.

CONCLUSION

To me, the only advantage that an endowment has over an ILP is this thing called the GUARANTEED component. In terms of all other factors, the endowment loses out to the ILP.

I can choose to surrender my ILP in one lump sum when the 20 years are up or I could slowly draw down the amounts in the 20th year, 21st year, 22nd year and 23rd year or I can don't draw out the amount (maybe my child does not make it to university at all)

Some argue that if the market is not doing well when I need the money, the ILP will fare badly. My strategy however is to increase the allocation in bond and fixed income funds as the date draws closer to my child's entry to university. Even so, I can chose to withdraw the funds over the 4 year period and hopefully the market recovers correspondingly.

THINGS TO NOTE:

Please do not take this as an advice or recommendation to buy an ILP for your child's education fund. The reason why you buy it is more IMPORTANT than which to buy.

For me, I have paired my ILP with a POSB Kids Savings account. So in that sense, the "guaranteed" component will come from the money in the bank account.

Also, my primary reason for buying the ILP is for PROTECTION and not savings. (Okay, maybe about 60% protection and 40% savings). That is the reason why I chose an ILP over an endowment as it gives me better protection. I did not consider term insurance as I wanted a plan that would guarantee the insurability of my child even after his university (if he chooses to continue with the plan)

Lastly, I think I know what I am doing. The most important thing is to know what you are doing with what you have. Only time will tell whether what I have chosen is a wise decision when the time comes for the money to be withdrawn. I'd like to think that I have got a strategy in place.

P.S. I know Mr Tan Kin Lian (ex-NTUC Income CEO) is a strong opponent to ILP and advocates a "buy term invest the rest" strategy. While I can agree with his argument intellectually, I find it hard to execute a "buy term invest the rest" strategy. These are due to practical reasons, emotional failures and psychological thinking. But this is better left for another posting.....