Insurance Helpline with Cedric Stephen
Question: What is the best education and long-term savings product for a newborn child? Scotia Mint, Omni or products from Sagicor Life Jamaica and Guardian Life are among some that spring to mind. I want it mainly for college education and for starter funds when the child becomes older. I am looking for something with a low premium, say, $1,000 to $1,500, with a good return in 18-20 years.
- g_tavya@yahoo.com.
Answer: In last week's article, I looked at what tertiary education is likely to cost in 2025. This should be the starting point in deciding how much to save. I also examined one of Guardian Life's equity-linked insurance products which, they say, can be used to create a nest egg for a child's education. This week, I will review two plans. One is offered by NCB: Omni Educator. The other is available from Heritage Education Funds International. It helps families to plan for college education.
The Omni Educator
This plan, like that of Guardian Life, is also a long-term life insurance product. Buyers pay fixed amounts (premiums) at regular intervals for a number of years to meet an investment goal.
Those funds are invested. Once the child is enrolled in an 'accredited tertiary institution' NCB will "award a 20 per cent education grant" on top of the interest earned on the accumulated premiums.
Example: Assume that $5,000 per month is paid into this plan; payments are made for 18 years; an average annual rate of interest of 15 per cent is earned during the period. The accumulated value of the premiums plus interest, after 18 years, would amount to $4,764,071.
When the value of the 20 per cent grant is added, the total amount available to the beneficiary would, therefore, be $5,716,886 (US$81,670 at current exchange rates).
If the regular amount saved is less than $5,000 per month and the interest rate falls below 15 per cent per annum, the payout would obviously be less.
Buyers can increase their monthly premiums. They can also make lump-sum payments. Interest rates are not guaranteed except for amounts paid in lump sums. The period of guarantee is one year.
THE HERITAGE PLAN
Heritage offers a Canadian-based US dollar college education savings plan.
Parents agree to save for the first year of their children's education. The Heritage International Scholarship Trust Foundation pays cash scholarships for the next three years. The scholarship comes with strings. Students are required to make "the minimum pass grade at the accredited university, college or technical institution anywhere in the world".
Example: Assume a monthly contribution of US$20 per month (say the equivalent of J$1,500); contributions are paid for a period of 17 years until July 2025; fees for membership amounting to US$366.30 are deducted.
The total funds that will be available for education will be US$7,145.35. Of that amount, US$3,482.35 would be paid for the first year and US$3,663 disbursed in equal instalments over three years.
This plan is flexible. Members can increase their monthly contributions. Unlike the other two products, Heritage provides information about its investment strategy. Funds are placed in US dollar government-issued, guaranteed and fixed-income investments.
The rate of return on the investment is only one of many things to consider before making a decision. The safety (or security) of the investment is also critical.
Serious trouble
This is very important, especially in today's world. Big banks and some large insurers - all around the globe - are in serious trouble because they made risky investments. This point should not be ignored when it is time to decide.
Which of the three would I choose? I like the plan from Heritage. My reasons are:
a) the company specialises in educational savings plans;
b) the benefits are paid in hard currency;
c) the company is a non-profit organisation;
d) it says more about its investment strategy than Guardian Life or NCB;
e) it offers a flexible plan.
Three or four years of tertiary education will cost more than an arm and a leg in 2025.
It is very important to start planning from now. Do some more homework. Weigh the pros and the cons of these and other plans from your point of view and then make a decision.
The earlier you start saving, the more likely it will be that your child will get a reasonably good start in the world of tomorrow.
Cedric E. Stephens provides independent information and free advice about the management of risks and insurance. Email: aegis@cwjamaica.com.
