Financial Planning for newborn baby

Financial Planning for newborn baby

baby-financial-plan-singapore

I’m sure you agree with me that your child is the best gift that you have ever received.

In spite of the lack of sleep due to caring for your newborn or tantrums that you have to put up
with, there is no doubt that we look forward to coming home early to interact with our child and
just hearing “I Love you Mummy and Daddy!” brings tears of joy to our hearts.

Along with the joys of being a parent, I’m sure you are also aware of the financial responsibilities that comes along with that role.

As with most parents, it’s a natural desire to give your child a head start in life.

To address the financial concerns associated with providing the best for your child, I would recommend that parents prioritize their resources as follows:-

1. Insurance planning for parents

This is often overlooked by parents as they tend to rush into buying a whole life or education plan for the child. Question is, who’s going to service the premiums in the event the parent’s income cease due to premature death, disability or major illnesses?

Using an analogy, if you have a goose that lays golden eggs, which would you insure first?
The goose or the egg?

It's the goose that laid the golden egg concept isolated on white.

Therefore, the top priority is for parents to boost their own insurance cover via a whole life plan
or a term plan that covers the period which the child can be expected to be dependent on the
parent’s continued income. My recommendation is about 25yrs for a baby boy, long enough to
cover a 3-yr university course plus a couple of years in the workforce after that.

As for the sum assured, you should consult with your financial adviser to determine the appropriate amount and it should take into account rising expenses over time as the child grows up. A 25yr decreasing term would be an appropriate instrument to cover the period of financial responsibility and it also addresses the reducing cumulative financial commitment required of the parents as the child reaches independence.

2. Hospitalization plan for the child

During the child’s early years, your child may be susceptible to high fevers, Bronchitis etc… and also prove to accidents. When the child needs medical help, parents tend to ‘panic’ easily and seek help from medical specialists or ward their child in hospital.

To protect against rising healthcare cost, it’s best to insure your child early.

3. Child Education Plan

Being your pride and joy, I’m sure every parent would like their child to get a headstart in life by being able to afford the best possible education. Given that inflation on education cost can be as high as 5-6%p.a and that money takes time to grow, it’s best that parents adopt a disciplined automated savings plan as early as possible. An endowment plan can serve to achieve that objective.

While parent’s can draw on their CPF to pay for the education cost, it’s only applicable if the child enters a CPF approved institution.

Even so, I would still recommend that parents set up a cash savings plan for their child and rely on their CPF only as a secondary source of funding. This is because the primary purpose
of CPF is for retirement.

In deciding the target amount to achieve by the child reaches tertiary age (age 21 for males and 19 for females), do consult with your financial adviser and it should take into account living expenses such as books, hostel fees, sports & recreation, transportation etc. Living expenses is a major component in a child education plan and if overlooked, the plan will be underfunded and thereby not achieving it’s intended objective as a result.

To achieve potentially higher returns over an endowment plan, you can consider complementing the endowment plan with an investment portfolio structured by your adviser with your risk/return objectives in mind.

An important feature that you can enjoy in an endowment plan is a Payer Benefit rider which
seeks to waive all premiums (till end of premium term) from the date the insured parent meets
with premature death, disability or one of the 30 covered critical illnesses. This feature serves
to assure the parent that the plan will continue even when they can’t and still deliver the funds
upon maturity so that the child will not be denied of a good education. Select insurers allow both parents to be insured under the payer benefit riders.

4. Whole life insurance plan

Yes surprisingly isn’t it that this appears as the last priority? The reason is because the chances of a child getting premature death, disability or one of the 30 covered critical illnesses is rather low during their initial years. That is why for the first 10 years of a child, the insurance premium rises only marginally.

Should you have surplus budget after planning for items 1-3 above, then by all means go ahead and secure a whole life plan for your child. This is the most ideal time to insure your children given their youth, good health and low insurance premiums.

By doing so, you have essentially

  • secured the future insurability of your child
  • locked-in low premiums and accumulate cash value progressively under the plan
  • protecting yourselves as parents and caregivers against any financial cost of an unexpected accident or illness on your child.
  • given your child a head start over their peers as they would be able to save and invest earlier in life compared to their peers who are building up their life insurance plans later in life and managing with relatively higher premiums.

Here’s looking at your future needs kids_Today_17Feb07 copy

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