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What you need to know:
- The sum assured in an education policy and the premiums to be paid is determined before the start of the policy.
- Saving through an education insurance policy is a long-term process and therefore, you need to be realistic about what you can afford to pay based on your current income and lifestyle.
- One of the many benefits of using life insurance as a savings tool for an education policy is the tax benefits that come with it.
Your children’s education is a long-term commitment that can consume tremendous expenditure. To ensure you don’t suffer this fate, consider taking an education insurance policy, which you can use to save money for your children’s education, whether you are present or not. “An education policy is a type of life insurance that is meant to provide a channel for you to save a certain amount of money for your child for their education. The life of the child is insured but the parent is the policy owner,” says Rhina Namsia, the chief executive officer of The Acemt Consulting, a financial planning, and investment advisory firm.
The sums and the starting point
The sum assured in an education policy and the premiums to be paid is determined before the start of the policy. These may remain fixed throughout the term of the policy. “The education plan has a saving period which ranges from 5 to 20 years. The duration of this policy will be chosen by you depending on the amount of funds you need and can afford to be paying on a monthly basis,” says Nancy Aketch, the founder and managing director of Taraji Insurance Agency. Start as early as possible. This can be as soon as your child is born. Namsia says that this will give you leeway to save a bigger lump sum than you would have saved when your child is 10 years old and in school. “A parent with a 1-year-old child may only pay about Sh. 3,000 for a Sh. 1 million principle of a 15-year term whilst another parent with a 10-year-old child may pay about Sh. 7,000 for the same policy,” says Namsia.
Determine the amount of coverage you need based on your goals for your child’s education. Some factors you may consider include: Will your child study locally or abroad? Which course do you see your child taking? How long will the course take to complete? Which schools would you want them to attend? “If you are keen on your children studying abroad, identify which country you would prefer, the possible tuition fees, and the cost of living,” says Namsia. Types of institutions and the cost of courses will differ. An undergraduate degree in medicine will cost more than finance or creative arts. According to Namsia, you can then calculate how much you need 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,” she adds. You can now start looking at different education plans in the market and choose the one that aligns with your goals and finances. It is advisable 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.
Check the affordability of the premiums you will pay. Saving through an education insurance policy is a long-term process and therefore, you need to be realistic about 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. “You can lose your money if you stop paying before the first three years are over,” she says. She advises that in the event you lose your job or source of income, request your insurer for a waiver period. “You can also request for more flexible payment options as your financial position recovers, but you must never stop paying the monthly premiums,” says Aketch.
Make sure you choose a pay or benefit rider. “This means choosing a policy that waives premium payment in the event you as the policyholder cannot pay the premiums due to the diagnosis of a critical illness, permanent disability, or due to an untimely death. By having this option, your child’s education expenses will be taken care of should anything happen to you,” she says. Additionally, one of the many benefits of using life insurance as a savings tool for an education policy is the tax benefits that come with it. Insurance proceeds are tax-free, and you can enjoy annual tax relief for the payment of education insurance premiums.
According to Aketch, an education policy mainly has the following salient features:
- Entry age for parents is between 18 and 64 years
- The maximum maturity age is 70 years
- The minimum sum assured is Sh. 200,000
- The policy can vary from 5 to 20 years
- Cash Value is 3 full years’ premiums if the policy has been in force for at least 3 years
According to Namsia:
- Don’t include unnecessary coverage.
- Don’t be in a hurry to sign up for a document that you have not fully understood.
- Don’t forget to research the insurance company you’re signing to.
- Don’t skip reading the inclusions and exclusions.
- Don’t refrain from getting your doubts clarified