The Straits Times
By Adrian Khiat
As a financial adviser, I have witnessed the joy of many young people when they become first-time parents. But there are also anxieties. Suddenly, there is another mouth to feed, and couples may find it financially difficult to cater to both their newborns and themselves.
Many are aware of the need to plan but may be confused by the myriad insurance and investment plans available in the market. So they may get their priorities wrong, especially when they face budget constraints.
Let me suggest to parents the following order of priorities when there is a newborn in the family.
Reviewing personal financial plan
- Risk management: Having adequate health, life and disability income insurance coverage should be the topmost priority of new parents. This will ensure that their families will be well taken care of in the event that the parent meets with a tragedy or suffers from a debilitating illness. One low-cost option is a decreasing term insurance. The sum assured decreases yearly at a certain rate to zero cover on maturity. The monthly premiums for a male and female, aged 30, are about $37 and $25 respectively, for a sum assured of $500,000 for 25 years.
- Cash-flow management: Catering to expenses such as the cost of employing a maid, acquiring a car or even paying for the child's food and medical expenses can be financially stressful for the parents. Therefore, they should evaluate how the baby will affect their cash flow by drawing up a family budget plan. By including the likely expenses, the budget plan will be a useful tool to evaluate which expenses are essential and which can be reduced.
- Wealth distribution: Under the Intestate Succession Act, where the deceased was married without children at the time of death, half of the assets will be passed to the spouse and half shared equally between both parents. However, the birth of the first child to a married couple will result in the portion belonging to the couple's parents being passed on to the child. Someone who has dependant parents may not want this to happen.
The couple can consider writing a will to name their beneficiaries, guardians and executors instead of letting the court decide.
Hospitalisation coverage for the child
It is necessary to get the right medical cover against hospitalisation expenses as a critically ill child can cause his family considerable financial strain.
Parents should identify the differences between hospital expense insurance, critical illness cover and hospital cash insurance.
Critical illness insurance provides a lump-sum payout if the patient is diagnosed with any of the 30 specified critical illnesses. Hospital cash insurance gives a specific amount of cash for each day of a hospital stay.
But both insurance plans may not be able to cover the child's hospital bill. This is where hospital expense insurance comes in handy as it helps to cover the hospitalisation and surgical bills.
Parents may consider taking up an integrated hospital and surgical shield plan, using funds from their CPF Medisave account and a complementary rider through cash payments to cover the deductible and co-insurance of the shield plan.
Saving for a child's tertiary education
Saving for a child's tertiary education is important but it may not be advisable for the parents to sacrifice their own retirement plans for this purpose because loans can always be taken for education expenses in the future but not for retirement.
Currently, local universities' tuition fees and related expenses are estimated at $10,000 a year. If education fees inflate at 4.5 per cent per annum, a four-year degree course can cost nearly $100,000 20 years later.
A parent can save via a regular investment plan, an endowment plan or a combination of both depending on his risk profile and preferences.
A regular investment plan has been historically proven to give better returns and it provides more flexibility than an endowment plan. The average annual returns of the MSCI Global Index yield around 6.5 per cent compared with an endowment plan, which gives around 3.8 per cent on maturity.
Get an honest and competent financial adviser who has your best interests at heart to discuss your options and evaluate your priorities.
The writer is a certified financial planner and a financial advisory representative from Professional Investment Advisory Services. The views expressed are his own.
This article was first published in The Straits Times.
