Preparing for your first child can be a daunting and confusing task. With so many different opinions and schools of thought on pregnancy, mothers often suffer from information overload. Not surprisingly, we leave it to the men to deal with the financial headache.
In this 2-part series, Jamson Chia, a certified financial planner and father of a 15-month-old girl, offers some advice getting adequate insurance coverage for your child.
1) What should parents-to-be plan for, financially, as they prepare for the arrival of their baby?
Parents should first work out their monthly expenses, and ensure that there is at least a surplus of $300 to $900 per month. Possible expenditure includes:
- Milk Powder (Worst case scenario, where mum is unable to produce enough milk for baby) $35 * 4 = $140.
- Diapers (Assuming usage of 5 per day, with usage of re-usable diapers twice a day) $0.40 * 5 * 31 = $62
- Vaccinations (Assuming you sign up a package) $700 (Some clinics allows installments over a period of 6 months)
- Body Cream and Diaper Rash Cream (About $100 for a good quality one, which could be used for 9-12 month)
- Extra Help required (Could range from $400-$600). This would be free if you are asking your parents to help out. However, you may still want to give them a small token of money.
- If you wish to send your child for enrichment classes after 6 months, it works out to be about $35 per lesson. Hence, cost may be around $140/month.
On top of that, you may want to factor these one time cost items if you are unable to get hand me downs:
- Breast Pump (Ranges from $79 for a manual one, to a $700 for an electric pump)
- Stroller (Ranges from $180 to $1500)
- Child Car Seat (Ranges from $180 to $600)
- Milk Bottles (Ranges from $50 to $150 for a set of 6)
- Sterilizer (Ranges from $80 to $300)
- Baby Cot (Ranges from $180 to $600)
- Baby Swing (Ranges from $100 to $300)
- Baby Thermometer (Rangers from $25 to $195)
- Buckwheat Pillows (About $35)
- Delivery Costs (Ranges from $2200 to $5000)
2) What is the difference between life insurance plans and endowment plans? Do we have to get both for our newborn?
Life Insurance is mainly divided into 2 groups:
- Term Life – Where you actually pay a very small sum to get your child protected in the event of death or total permanent disability. However, if nothing happens to the child, the money is sunk, and you don’t get any returns.
- Whole Life – Premium may be a little pricier. However, it doubles up like a small savings plan, which you will get back some returns if nothing happens to the child. However, its scope of coverage is usually the same as what is covered in the term life.
Endowment Plans are primarily used as a savings vehicle, where you know you would need this amount of money by the time the child turns 18, 21 or 24. For a girl(boy), she(he) will most likely enter university when she turns 18(21). Hence, some parents would like to have that sum of money when she(he) turns 18(21).
However, most parents may not be aware that the Singapore Banking system is rather pro education. Whilst you are still an undergrad, the interest for the tuition fee is waived. Hence, you can get the loan, whilst letting your endowment plan continue to accrue more interest and dividends. Hence, you may want to consider getting a plan maturing in 21 years / 24 years for a girl / boy.
For some parents who are financially more savvy, they may opt to do regular investments towards a child’s education planning. If the time frame is long (i.e. more than 15 years), statistics shows that you will get a better return on your money. However, this method needs you to have a right strategy, and a discipline to follow the strategy.
3. Usually, I would do a detailed analysis of the overall family’s financial situation before giving my recommendations. It differs between families. However, general rule:
a. Is the main breadwinner adequately covered? Usually, I would ensure the dad is covered more. Reason: We don’t wish to face the situation where the child not only loses father (Due to death or disability), but also losing mum (Due to the fact that she may have to take on 2 jobs to make ends meet, and hence, not being able to spend time with the child). It will be a double tragedy. It would be pointless insuring your kid adequately, when you are not covered sufficiently. There is no bread on the table when you need it the most.
How much is adequate? I would strongly encourage you to speak to your trusted advisor. He would be able to share with you in greater details, as he would be in a better position to analyze your situation and portfolio.
However, as a general rule of thumb: At least 20 to 25 years of annual expenditure of the family. This does not take into account of inflation.
b. Assuming both parents are adequately covered, you may want to ask, what would you like this coverage do for you? Give your child a head start, so that he/she does not need to worry about his/her 1st policy when they start work?
Honestly speaking, Medical Insurance should be the 1st plan that you MUST get for not only your child, but the entire family. Medical bills can create a financial catastrophe for the family, which can easily be insured for less than $50/month per person. And part of this can be paid via CPF Medisave.
This article was first published in The New Age Parents Online Magazine Jun 09 issue Page 34