Providing for a child early in life is a good idea – over time, insurance gets more expensive; and the longer you wait, the longer your child goes (financially) unprotected. A common question at this point is whole life or endowment? Both have their pros and cons, and here’s how to pick:
What is whole life insurance?
Whole life insurance is a protection oriented financial product. That is, the intent is not so much to grow money for your child, but to provide in the event of your child’s illness, disability, and death.
With whole life insurance, you pay the premiums for a certain number of years (usually five to 20 years), after which the policy protects your child life (up to the age of 100).
Whole life insurance is always cheaper when bought at a young age. In particular, premiums for whole life insurance become much higher after your child is diagnosed with medical conditions, such as asthma or arrhythmia.
What is an endowment policy?
An endowment policy is a financial product geared toward wealth accumulation. Unlike whole life insurance, endowment policies provide only a death benefit (although you can buy riders, which increase premiums to provide other forms of coverage).
Endowment policies last for a predetermined period, typically 10 or 30 years. At the end of this period, you will receive a lump sum pay out. The amount varies based on the policy, but most endowments will grow your money at around two to four per cent per annum.
The lump sum pay-out can also be assigned to your child, but this is generally inadvisable (unless you are okay with your 20-year-old child suddenly receiving large sums of cash).
A note in payer benefits for parents:
For both whole life insurance and endowment, you can buy payer benefits. This will raise premiums slightly; however, payer benefits mean that – should you pass away – the remaining premiums on your child’s policy are waived.
This is a useful consideration for parents in high risk jobs.
Which is the correct policy to pick?
Neither policy is inherently better. Rather, it depends on what you intend for the policy to do. The key things to note are:
- Endowment policies provide greater flexibility
- Whole life policies lift the burden of insurance premiums
- Endowment policies are better for targeted goals
- Whole life plans carry an unpleasant connotation for some parents
1) Endowment policies provide greater flexibility
Because endowment policies end in a lump sum cash pay-out, they provide more flexibility. For example, say you purchase an endowment policy, to provide for your child’s university fees.
However, by the time the endowment matures, your child has decided not to pursue further education; or perhaps your child has received a scholarship, which makes the endowment money unnecessary.
In such an event, you could repurpose the money for other needs. You could use to enhance your retirement account, use it as seed money for a small business, set it aside for your child’s future wedding or house, etc.
Whole life policies are more fixed: once you’ve purchased the policy, the money can only go toward your child’s financial protection, and nothing else. If it ever becomes unnecessary (e.g. you become affluent and can more than provide for your child’s medical needs, or your child earns more than enough to buy her own insurance), then you may wish the money was around to be invested elsewhere.
2) Whole life policies lift the burden of insurance premiums
The biggest upside of whole life policies is that, once the premiums are paid, they’re no longer a worry. Even if you lose your source of income later, you’ll know that your child is protected.
Also, insured children are relieved of the need to buy insurance for themselves. As a frank reality, you don’t know how financially responsible your child will be. If it turns out they’re not good with money, and don’t have the initiative to insure themselves in future, you’ll be glad you bought them a policy. One important benefit of whole life policies is that you can add riders to provide coverage on Critial Illness for your child. This may be important because in the event of critical illness, the lump sum cash pay out may be useful for medical treatment for your child.
3) Endowment policies are better for targeted goals
If you have a specific goal in mind, such as providing for the down payment on your child’s first home, or paying for your child’s first car, then endowment policies are the way to go.
As you already know how much you’ll need, it’s easy to compare and pick the right policy.
On the other hand, if you have nothing specific to plan for, you might want to focus on protection and use a whole life policy instead.
4) Whole life plans carry an unpleasant connotation for some parents
There is one other reason some parents choose endowments, which has nothing to do with money.
Using a whole life plan seems to carry the connotation that, should your child die, you would intend to benefit from the child’s death. This carries moral and psychological connotations, that may be unpalatable to some parents.
Whichever option you pick, you need to compare premiums and pay-outs to get the best deal.
Not all insurance policies are equal. It’s possible for some policies to be more expensive, while providing only the same coverage or pay-outs. Fortunately, you don’t need to spend hours comparing between brochures.
Visit FinAlly.sg to compare between the best policies instantly. You’ll even get a 50 per cent rebate, if you apply online.
Or if you have special needs and considerations, you can contact one of our financial planning experts, at RAY ALLIANCE Financial Advisers.