A trustworthy and a very close friend of my wife highly recommended this education savings plan to me. I am inclined to take a closer look at the plan because I know that commissions she earns from selling insurance does not form the bulk of her income. She has other things going on for her. The conflict of interest, though not entirely eliminated, is at least kept to a minimum. If the recommendation was from anyone else, I must admit that I wouldn't give it a second look.
So was I disappointed by the recommendation? Not totally, but I think the financially savvy can do better with a bit more effort and discipline.
The plan is called Manulife Educate. Here are some screenshots of the brochure I received.
Let's take a closer look at the example provided to determine if we are really getting good value.
Nancy's father bought the Manulife Educate policy for her at birth, paying a premium of $3723.20 a year for the first 10 years. The total guaranteed cash benefits received when Nancy turns 21 is $44,000. The estimated bonus at maturity, assuming a return of 4.75% per annum, is $17,668.
In summary:
Total premiums paid: $37,232
Total returns (guaranteed benefits + non-guaranteed bonus): $44,000 + $17,668 = $61,668
Looks good at first, but let's analyse the numbers in two segments: (1) Non-guaranteed Bonus and (2) Guaranteed Benefits.
Non-Guaranteed Bonus
Non-guaranteed bonus is, well, not guaranteed. If we can set-up an imaginary portfolio that tracks the performance of the funds that the policy buys into, how much do we have to put into the portfolio in order to have $17,668 (assuming 4.75% annual returns) after 21 years? I did some calculations using a spreadsheet, and the result is: $814.30.
In other words, if we can save $814.30 every year, and generate 4.75% per annum on that savings, we will have $17,667.58 in 21 years. Note that we are not discussing whether 4.75% is an achievable target, nor are we analysing which investment product gives you the best chance of achieving this return. We are merely determining the amount that we need to put aside every year, channel the money into somewhere that yields the same return, so as to have the equivalent of the non-guaranteed bonus offered by the policy.
Guaranteed Benefits
If we set aside $814.30 every year to try and get the non-guaranteed bonus, we will have ($3723.20 - $814.30) $2908.90 left. With this amount every year, what would be the required rate of return for us to receive the same amount of guaranteed cash benefits offered by the policy?
The answer is, 2.89%.
Meaning to say, the policy offers you 2.89% return per annum for the guaranteed benefit. Is this a good enough return for tying up your money for 15-20 years? Would you put your money into a 15-20 year fixed deposit for 2.89% p.a.?
Alternatives
To beat 2.89% p.a. is not hard if you invest in a low-cost STI ETF for the long term. However, that is hardly a close alternative because of the risk involved.
A closer alternative to the policy is our Child Development Account (CDA) and Post-Secondary Education Account (PSEA). The interest rate for monies in CDA is currently at 2% p.a. (for balances up to a maximum of $36k for OCBC), while that for the PSEA is pegged to the CPF OA rates (currently at 2.5% p.a.). The money in the CDA account can be used to pay for approved expenses, so it's not totally illiquid. When your child turns 12, unused money in CDA will be transferred to PSEA, which can then be used to pay for post-secondary education expenses.
So how does this alternative compares to the Manulife Educate policy? Again, I ran some numbers and found out that we will end up with about $4000 lesser. That's about $200 lesser yearly.
As with most things, there are always the good and the bad. Below is a summary:
If I just starting out in my career, I would probably appreciate some liquidity in the first few years of my child's life. CDA-PSEA will suit my needs better.
If I aspire to send my child for overseas education, I will prefer to receive all benefits in cash. Manulife Educate will then be my choice.
If I think that interest rates will rise, even if I know I will be worse off by $4000, I might still decide to take my chances and buy into something with returns that better track the risk-free interest rates. In this case, CDA-PSEA is better.
If I would rather not manage that $814.30 every year to try and get the non-guaranteed bonus offered by the policy, then Manulife Educate will work for me. I will just leave it to the "experts" to manage my money. [Like AK71, I don't believe in mutual funds and unit trusts due to the high expense ratio. But I believe for some, these might still be their best option.]
There is no easy option. What I've done is to break down the policy and analyse it in greater detail. Hopefully this helps us in our decision-making.
*The plan provides the Life Insured with coverage for death and terminal illness. I don't currently have the details to this coverage, hence I've left it out in this analysis, Depending on the coverage, the policy might become more or less attractive.