When starting a family, a lot of people consider buying insurance – not just for a medical or life plan but also to save up for their children's education.
Is insurance what you want, though? Should it be your choice of investment for coverage/protection as well as savings?
Carol Yip, founder and CEO of Abacus for Money, says while insurance is good for certain things like medical and accident coverage, it shouldn't be seen as the only option, especially when it comes to savings.
“Because a lot of us find it hard to save money, we think we must buy insurance. In which case, how much is enough? I have to say that you can never buy enough of insurance.
“The question is, must you buy insurance? There are many ways to save up and build an education fund. My tip is don't buy so much insurance that most of your salary goes to paying the premiums every month. If you do that, where are your savings then?
“When you talk about a family, the objective is to make sure that should anything happen, the parents have enough money to pay for their medical and hospitalisation bills as well as to take care of the family. There's also the need to pay for their children's medical bills and education,” says Yip.
Objective of the policy
She advises couples intending to buy a policy for their family to first ask themselves what is their objective – do they want coverage or investment.
Yip warns couples not to buy insurance for the sake of buying it, just because a friend or family member is an insurance agent.
“Half the people who buy insurance are helping a friend or a relative. If you do that what happens? You are just buying the policy for the sake of buying. You are not really interested in what you are buying. You are just helping someone.
“Then when you need the money you find that you can't claim because you did not buy the policy that suits your needs. This is because when you were buying you did not understand what you were buying,” she says.
Research, listen, ask, note down
Yip suggests that couples do their research before approaching an insurance agent to buy a policy. This way, they will be in a better position to ask the pertinent questions and compare policies to find one that suits their family's needs.
She also suggests shopping around as different insurance companies offer slightly different policies.
When you're ready to sit down with your agent, ask for a quotation. Look at it and see how much you have to pay, not just today, but also as the premium goes up over the years.
This is important as it will affect your cash flow.
Yip recommends those buying insurance to jot down points when their agent explains the policy to them. Insurance contracts are not easily understood by everyone and at least if you jot down the points you will be able to refer to it 10 years later when you can't remember why you wanted this policy and what attracted you to it.
“If you have to, sit down and go through the policy contract point by point with your agent. Write your own summary of the important points as you go along,” she says.
For healthcare and hospitalisation, Yip recommends families get a medical plan. This will help them pay the hospital and medical bills as well as take away the stress of worrying about how to pay the bills.
She suggests families get something that they can afford and according to the parents' income level.
Education fund
As for education, Yip suggests couples keep their options open by exploring all possibilities for investment/savings rather than just zeroing in on insurance.
“Society has come up with this paranoia; everyone now feels that they must buy insurance for their children's education fund.
“There are cases of parents who have taken insurance for their children's education and then find, years later, when they cash out the plan there really isn't a lot of money. Why? Because education costs and living expenses have increased. Basically, the cost of sending a child overseas has gone up.
“In addition, we would have had a few financial crises since they started investing and each time there is a crisis there is damage to the investments and definitely the cash value will not be on the uptrend all the time.
“It also depends on your timing for when you cash out. If there is a crisis in 2009 and you cash out around that time, definitely the value will be less,” says Yip.
She asks parents to think of other creative ways to save up for their children's education.
Among them are investing in property, maintaining it by renting it out and then selling it just before you need the money for your child's education.
Another way is to buy currency when the exchange rate is favourable to you and then keeping it until it's time for your child to go abroad. Then use that money to pay for school fees.
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