This, to me is the area that is something we must cater for, regardless if we have life-cover or not. A common mistake I believe we make is putting funds into an endowment or long-term product that provides for tertiary education. I don’t believe that it is necessarily wrong, but I believe we could use other tools more effectively to get to the same result and provide for more needs along the way. An example of this is a Tax-Free Savings Account. This product uses a unit trust as it’s base and will be more tax efficient and be a huge savings vehicle for education if managed right. The bonus is that it is fully accessible prior to the varsity years. So, if little Johnny needs speech therapy, or Lerato requires extra classes to get those university entrance criteria, you can use the funds immediately. Bear in mind that you are limited to R33,000 per person, per tax year, and a total of R500K in his/her lifetime as a contribution. This again highlights the need for a financial planner to tailor-make a solution to the need.
An educational plan in the form of an endowment is limited to a maximum of 20% extra contribution per year. It also becomes a problem, in my opinion, if you get retrenched or hit tough times. If you can’t continue with the premiums, you may face penalties being charged on the investment, eating away at the saved capital. Another factor is the type of funds that you use within the LISP or investment product. The funds determine the return. The time-period will also be a determining factor towards the risk profile of the fund.
Having a child brings great responsibilities. These responsibilities, if planned for correctly, need not be something that keeps us up at night. As parents, we hope and dream for the best, and half the time wish we could bubble wrap our children to protect them from the world. We may not be able to stop them from falling, but we can keep them up when we fall and can’t get up, by ensuring our life cover and Wills are in place. We can also set up a firm foundational platform for their dreams by diligently investing. As I’ve said throughout, just like a parent guides a child, we need financial planners to guide us on what to do in getting a tax-effective-plan, catering for our kids’ needs in the future.