Financial Planning for Children

At the beginning of 2007, a few of my clients are blessed with babies, who added much joy into their life. As usual, my role was to assist these proud parents to work out a financial plan for their children. I would like to share the processes i used.

There are basically 3 areas of financial concern when planning for children:

Concern number 1: Risk Management

How financially prepared are you if your child has critical illness? Nobody likes to experience this situation, but in reality, some of us will face it. No parents will dispute the time spent with one's child during critical time is important, but one needs sufficient financial strength to do this. (For example, taking no pay leave for 3 years etc)

A good solution to deal with this concern is a portfolio of critical illness and medical insurance on the child while he/she is healthy.

Concern number 2: Education Funding

Planning for university funding cannot depend on luck, parents need to take control. It is probably the one and only substantial saving parents do for someone else.

Since most parents will be the owner and payor for such plans, one has to consider whether the saving effort would be disrupted by the parent(s) death, disability, critical illness or financial stress.

If the parent(s) is a business owner, is the university funding plan shielded away from the business owner's business liabilities?

A good solution is a portfolio of trust- owned endowment policy, trust-owned investment-linked fund with yearly top-ups, and deferred annuities.

If the grandparents have existing whole life insurance policies which have outlived their objective, it might be good to assign these policies to the parents for the benefit of the grandchildren.

Concern number 3: Will and Trust Planning

Most financial plans are seriously compromised if a common disaster falls onto (both) the parents. It is not uncommon to see the saving plans intended for the children being diluted by the estate settlement process.

A wise solution is to revise the parents' wills to include a guardian to look after the children's welfare in case of common disaster on the parents, and effect a trust-owned life policy which specifies the children as the beneficiaries.

In going through the thought process of risk management, education funding, and will & trust planning, the parents can then deploy their financial resources effectively to address above concerns.