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Your children’s education is more than a short-term expense. It is a long-term commitment that can stretch over a long period of time. You can expect to see them through 12 years of elementary and high school, and 3 more years of university. Financing such a long-term commitment can be a daunting task.
As university tuition fees continue to rise, many parents
are taking out expensive loans that will lead them further into
debt. To ensure this doesn’t happen to you in the future it would be smart
to consider an Education Insurance Policy. This type of insurance
can be used to save money for your children’s education, whether you are
present or not.
Having said that, despite the number of educational plans
being offered by insurance providers, not many people are fully aware of what
an educational insurance policy is all about. To help in that regard the
article will look into what is an education insurance policy, the type of
coverage you need and things to consider when taking out such a policy.
What is an educational insurance policy?
An education insurance policy is a type of life insurance product
that is designed as a savings tool which pays a lump sum to cover your
children when they reach 18 years or above, and about to join the
university. The money paid out is meant to cover their university education.
Under this policy, the parent/legal guardian is the policyholder while the
child is the life assured.
In addition, there are some educational insurance plans that
are insurance cum investment products. Referred to as unit
linked child plans, part of the premiums paid goes towards life cover
and other policy fees (administration, fund management, premium allocation
etc). The remaining amount is invested in funds as per the policy holder’s
discretion. The money invested will generate market-linked returns. Should
the policyholder survive the term of the policy, the value of the fund is paid
to the policyholder.
Here are some key features of an education policy that makes
it an attractive option when it comes to financing your children’s university
education. They include:
- Once
the child is born you can begin saving immediately. This way you can save
for a long time and expect a considerable lump sum once he reaches 18 years
of age.
- You
can pay premiums on a monthly, quarterly, semi-annual and annual basis. In
addition, you can increase or reduce the amount you pay to improve your
savings with exceptional premiums.
- It
is a savings plan that has a life cover with your child as the only
beneficiary.
- You
have the option of investing in the capital markets
- There
is a competitive annual rate of return on your investment.
- You
also have the option of adding permanent and total disability coverage.
Now that you have a better understanding of the basics of
the policy and the main features, you can start figuring out what amount of
coverage is perfect for your needs.
How much coverage do you need?
The first step to determining the amount of coverage you
need for your education policy is to establish a long-term goal. What are
your aims for your child’s education? Depending on your situation there
are some factors you may have to consider when determining your level of
coverage.
To begin with, where does your child plan to study, locally
or abroad? If you are keen on your children studying abroad, it would be useful
if you can identify which country you would prefer. Apart from the tuition
fees, you will also have to factor in living costs which can be quite
considerable, depending on the country in question.
Another thing for you to consider is the university of
choice. Keep in mind that top-notch institutions are more expensive compared to
mid-level universities or technical colleges. The same can be said of the
course your child intends to study. Some courses are more expensive than
others. For instance, an undergraduate degree in medicine will likely cost more
than one in finance or creative arts.
Another factor would be how long the course would take to be
completed. A longer course will mean digging deeper into your pockets to cover
incidental expenses. Working through this factors will help you to map out the
expected costs. You can calculate how much you actually need by using this
simple guide:
Take the Current Annual Course fees + The Expected Living
Costs X The number of years to study = How much it would cost you today
Since the education expenses will be incurred in the future,
you also need to factor in inflation. Once you have taken inflation into
account, you will most likely end up with an amount that is beyond what you
currently earn. With this information, you are now in a better
position to start looking at different education plans in the market and choosing
the one that aligns with your goals.
What plan should you purchase?
The education policy you decide to buy will depend on your
risk tolerance and your goals. Before you purchase the policy instruct your
agent to carry out a fact-finding assessment of the recommended policy to
ensure it covers your needs and is within your financial capacity.
It would be advisable for you to choose a policy that gives
you access to your funds whenever you need them. An example would be a policy
that matures when your child starts university or one that allows you to
receive part of the insurance benefits before the maturity date. The following
five tips can act as a guide when you buy an education policy.
- Ensure
the premiums are affordable: Saving through an education insurance
policy is a long-term process and therefore, you need to be realistic on
what you can afford to pay based on your current income and lifestyle. If
you start with a higher amount than you can afford, you could end up
terminating the policy and losing your money altogether when faced with
financial difficulties.
- Make
sure you choose a payor benefit rider: Make sure you choose a policy
that waives premium payment in the event your parent/legal guardian is
unable to pay for the policy, due to the diagnosis of a critical
illness, permanent disability or arising from his untimely death. By
having this option, your child’s education expenses will be taken care of
should anything happen to you.
- Keep
an eye on the funds: After you purchase a policy, you need to monitor
the funds to ensure you reach your goals. Actual returns declared by the
insurance provider may be different from initial projections (especially
for investment-linked policies) due to changes in the money markets. You
may also discover the actual cost of university education may differ if
the course selected by your child is different from the one in the initial
plan. In the case of an overseas education, currency exchange rates may
fluctuate and change your fund balances slightly. However, if there is a shortfall
in the funds required, some education plans have a provision for a study
loan.
- Do
not include unnecessary coverage: Many educational policies allow you
to add extra insurance options like surgical medical insurance and
critical illness cover. Be wary of adding too much insurance coverage as
the cost of the premiums will definitely go up.
- Find
out if there are tax incentives: One of the many benefits of using
life insurance as a savings tool for an education policy is the tax
benefits. Insurance proceeds are tax-free and you can enjoy an annual tax
relief for the payment of education insurance premiums.