Disclaimer: The author is an independent Registered Financial Planner (RFP) and is not connected to any life insurance provider. This article is an opinion and for information purposes only. Computations may vary.
Education is one of the greatest things you can leave behind for your child. A car, a house, stocks, pieces of jewelry, collectibles, and other material inheritance may come and go, but education will stay with your child forever. It is surely one way to secure a comfortable life for your child when they grow up. Education is both your obligation and your legacy to your children.
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Unfortunately, education is not something cheap. It can sometimes be more expensive than a car or a house. It is one of the major expenses that families need to prepare for and this is the reason why you, as a parent, need to plan for it.
In the Philippines, when CAP (College Assurance Plan) went bankrupt, there (all of a sudden) appeared a huge vacuum for a pre-need college education plan. Parents scramble to find alternatives. With CAP, you pay less than P20,000 in the early ’90s, and your child’s college fund is already secured. Unfortunately, there is no such thing now and parents need to budget and save regularly for their children’s college education plan.
This vacuum led life insurance companies to offer their VUL product as an alternative for a pre-need college education plan. But is this worth it?
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The short answer is, if you have more than 19 years left before the college education of your child, then it is worth it, anything less than 19 years may not be the best option for you. From our previous article here, we ran the numbers and found out that only on the 19th year will your VUL fund value be greater than when you invest it on your own. Yes, 19 years… Why is this? Because in a VUL plan, you are paying for the agent’s commission, and also the life insurance itself. Not everything goes to investments. Remember VUL is still a life insurance policy and life insurance is never free.
The question that begs to be asked is, why would you buy life insurance for your child when the chances of untimely demise are low? Why would you take out that same life insurance when he or she gets older and when the chances of untimely demise may be higher? Isn’t it ironic?
Does your child (who is young) need to have life insurance? In an untimely demise, will your family lose an income source? The “normal” answer to these questions is a “NO”. So why then do you buy a life insurance product for your child? – Because the life insurance agent said that’s your best option… that’s why…
What’s the Alternative Then?
The simple answer is to invest on your own. “I do not have time to monitor the market”, “I do not have time to study the different investment vehicles”, “I do not have a finance degree” are all common excuses you make. But did you know, in today’s connected world, you only need to spend one day (yes one day) to find out the different investment vehicles available for you?
In one day, you will find out that you can actually invest on your own on the mutual funds that life insurance companies invest in (See COL Mutual Funds). You can check the performance of different mutual funds on PIFA.com.ph. Learn the pros and cons of different investment vehicles on Wealth Arki or Vince Rasipura on YouTube. You can check out different alternative investment vehicles on this blog or on phinvestmentyield.com.
If you invest on your own, you bypass the commission you pay for your agent. You bypass the payment you waste for a life insurance plan and admin fees your child does not need, and 100% of your money is invested now (and can already start to grow) unlike in a VUL where the majority of your money only goes to investment years from now.
Planning For Your Child’s Education Plan
The first step is to know the approximate tuition fee today. Then use the Future Value Calculator and input the following:
- Number of Periods (N) – Number of years before the start of college
- Starting Amount – Approximate tuition fee today
- Interest Rate (I/Y) – Average tuition increase OR average inflation rate – in the Philippine setting, a good number is 4% to 6%
- Periodic Deposit (PMT) – set to zero
From our example above, let’s say your child is 3 years old today and college is 15 years from now. Today’s college tuition fee in ADMU is approximately P198,000. Let’s use 5% for the approximate tuition fee increase per year for 15 years. The total money you need to have 15 years from now for your child’s college (1 year) is approximately P411,628 or P1,774,168 for 4 years considering the yearly increase of approximately 5%. This is excluding books, allowances, board and lodging, and transportation.
The above computation shows how you actually need. If you have P100,000 today saved up for college of 1 child, you need to top up those savings by P71,323 yearly for 15 years all while keeping it in an investment vehicle that will yield 5% interest per annum.
If your timeline is 10 years or more, you can invest in stock or equity mutual funds such as PhilEquity Fund or Sun Life Prosperity Equity Fund. You can also invest in index funds where it just mirrors the performance of the Philippine Stock Exchange Index (PSEi). Examples of these are the Sun Life Prosperity Philippine Stock Index Fund, PhilEquity PSE Index Fund, PAMI (PhilAm) Equity Index Fund… Did we mention you can directly invest in the mutual funds your VUL plan is investing on? All these you can invest using COL Financial Mutual Funds tab. Check out our previous article about investment time horizon and tools here.
Below is another sample calculation at an 8% interest rate. Here, you only need save P52,656 per year.
When will opting for a VUL be a smart move for your children’s education plan?
There are 3 criteria when opting for a VUL plan may be a good choice for your child’s education plan. (1) When you are absolutely too lazy to care about where your money is going – or a more formal way to put it – you don’t have time to study investments. (2) When your insurance agent acts as a true financial advisor and suggests where and when you should transfer from one mutual fund to another depending on market condition. If your financial advisor has years of experience and can call when is a good time to transfer to equity funds or bond funds and vice versa. If you don’t have any of the two conditions, you are simply throwing money down the drain.
