Children Education Fund

Since my son was born, I was approached by a couple of insurance agents to sign up for their children education fund product. I declined their offer since I'm not looking into taking up insurance products as my son's education plan. I have some other things in mind. Besides, my employer covers for his hospitalization and my wife's employer covers for his outpatient and hospitalization benefits. Basically, he is quite well protected should he need treatment at hospitals.

Insurance needs differ from person to person. But generally, it's safe to say that you don't need insurance product as your child's education plan. Before you take up an insurance product, better ask yourself a few questions. This will avoid yourself and your family from being over insured. The money might well be spent elsewhere. Ask yourself these questions:
1. Who will suffer financially if anything were to happen to your child? I'm not talking emotionally yeah. Most likely the answer to this question would be none. Basically, you don't need to insure your child to get monetary benefits from the plan.

2. Does your employer provide sufficient coverage for your child hospitalization? Is the coverage adequate? The most important coverage would be for hospitalization. As long as that is covered, I think your child is in pretty good hands. You would always have the option of going to public hospital should any of your child's treatment exceeded the sum insured.

3. Do you want insurance coverage or education fund for your child? It's best to take separate products for each purpose. In insurance terms, if you try to kill two birds with a stone, it's likely you'll have to pay a huge price. As far as I've seen, there is no insurance product which can serve you two purposes but at the same time keep monthly contributions low. So decide for either one.

Having asked yourself these three questions, it's likely that you will not take up any of the insurance products as your child's education plan.The next question will be what are the options available? Let's compare a few.

Insurance Linked Products
For comparisons sake, let's just take an insurance product as example. Click on the link for one of the available insurance product in the market. The single most important thing to note about insurance linked products is the charges. I would say the charges are exorbitant. The said product charges wakalah for agents' commission and distribution related charges, service charge, assessment charge, risk management charge and tabarru'. Let say you are going to contribute RM300 per month for the product, after deducting the charges, you'll be left with little amount of money which goes to the investment related portion and protection portion. At the end of the product tenure, you might not get the whole amount of money saved since the beginning. The amount might be lesser or more than your total contribution. It all depends on how the investment related portion of the product performs.

Amanah Saham Gemilang (ASG)
ASG is a product by Amanah Saham Nasional Berhad (ASNB). It is open to all Malaysians aged 6 months and above. Akaun Dewasa is for those aged 18 years and above and Akaun Bijak is for those between 6 months and 18 years old. The service charge for this fund is 5% and 3% for non-KWSP and KWSP investments respectively. For the past 3 years, it has declared distributions of 7 cents, 5.5 cents and 5.5 cents per unit respectively in 2008, 2009 and 2010. It behaves just like the normal private unit trusts in the market. Fund holders have the opportunity to gain income from distributions and capital appreciations. Still the down side of this product is the service charge.

Amanah Saham Didik (ASD)
ASD is also a product by ASNB. It is open to all Malaysians bumiputera aged 6 months and above. Akaun Dewasa is for those aged 18 years and above and Akaun Bijak is for those between 6 months and 18 years old. There is no service charge for this fund. The fund unit price is RM1. For the past 3 years, it has declared distributions of 7 cents, 6.3 cents and 6.35 cents per unit respectively in 2008, 2009 and 2010. It is a fixed price unit trust which serves well for investment as important as an education fund. Basically what amount of money you keep, you'll get it back plus distributions.

PTPTN
PTPTN stands for Perbadanan Tabung Pendidikan Tinggi Nasional. It is a fund introduced by the government  to support the needs of Malaysians going for tertiary education. Among the benefits of saving with PTPTN is the tax exemption of up to RM3000 per year for parents who saved for their children. Besides that, there are also insurance coverage and the savings are risk free since they are guaranteed by government. It has given dividends ranging from 2.5% to 4% from 2004 to 2009.

How much should you save for your child? I like to make RM28,000 as a standard figure for this fund. The reason being when I was studying in university, I received scholarships of around RM7,000 per year for 4 years. For university courses presently, the amount required for 4 years are about the same as during my university days. The figure is a pretty good estimate on how much you would need to fund your child's tertiary education. Unless of course you are planning to send your children overseas or enroll them in private institutions or send them to do medics for 5 years. I'm just stating a base case here.

My plan to achieve this target is pretty simple. I would save RM3,000 per year for my child until he reaches 19 years old when he is expected to enroll for tertiary education. If RM3,000 were to be saved in a risk free fund, total accumulated after 19 years would be RM57,000. That is without considering the amount of dividends received during that period. First, I would save the money in ASD. After he reaches 12 years old, I would then transfer all the fund to Amanah Saham Bumiputera (ASB) in order to gain more dividend.

To some, maybe RM3,000 per year or RM250 per month is quite a big commitment. But consider this, if you can't save RM250 per month for your child, try half that amount i.e RM125. That in turn will be RM28,500 after 19 years without factoring in the dividends. I believe this is an even realistic and achievable target. Bottom line is, put your money into risk free instruments so that you'll not lose any amount you've saved over the years.

I believe the best gift from parents to a child is quality and debt free education. This should actually be the parents responsibility. Your child will also be debt free when they start their career and ensure that they can focus on more pressing needs such as owning houses which is already at beyond affordability of the majority.