The day when your eldest son or daughter packs their bags and heads off to university for the first time might seem a long way away, but with costs rising it definitely pays to start planning sooner rather than later. One smart way to make a start is through an endowment plan.

Time horizons are usually fixed according to university entry ages – 21 for boys, 18 for girls – meaning that savings cannot be left exposed to too much speculation and market volatility. That’s why exploring a savings vehicle like an endowment makes such good sense, and it’s why planners and advisers repeat the word ‘diversification’ so often.

An endowment plan is basically a savings plan bundled with insurance coverage for death and total and permanent disability. Some also come with additional terminal-illness benefits. Such plans can be divided into two distinct categories: single-premium endowment plans and regular-premium endowment plans.

Both those categories can in turn be divided into ‘straight’ and ‘anticipated’ plans. An anticipated endowment pays a percentage of the sum assured annually, usually from the second policy year onwards. There are also bi-annual and tri-annual plans that stagger cash payouts every two and three years respectively.

Another distinction is between non-participating and participating plans. Non-participating plans do not participate in the profits of the insurer and therefore do not carry projected non-guaranteed values. Participating plans, on the other hand, have projected non-guaranteed values based on an assumed PIROR (projected investment rate of return), which can be as high as 5.25% or as prudent as just 2.5%, depending on the insurer.

As its name would suggest, a single-premium plan means you make only one payment, subject to a minimum generally set at S$5,000, using cash, money from your CPF Ordinary Account, or, in some cases, your Special Account or Supplementary Retirement Scheme (SRS).

The shortest term available lasts for four years, while the longest has a duration of 30. Other than simply comparing which plans offer the highest returns, look at the additional benefits and also check out how liquid or illiquid the plan is by looking at the lock-in period during which a penalty for early withdrawal is imposed.

Perhaps the most compelling reason for setting up an endowment plan is that it can be set up to be self-completing or self-financing. By adding an additional or supplementary benefit called a payer benefit rider, you can safeguard education savings against the premature death of either one or both parents, as well as total and permanent disability or any of 30 critical illnesses.

In such an event, the insurer will waive all future premiums and continue to pay the premiums until the maturity of the plan, so whether you are still around or not, the plan will yield upon its maturity the lump sum needed to fund your children’s education.

THIS ARTICLE IS REPRODUCED COURTESY OF SMART INVESTOR MAGAZINE