Is it better to use life cover or an education protection plan to ensure that your child’s education is provided for in the event of your death?
Every September, which is “Wills Month”, there is a focus on estate planning and drawing up your will. If you are financially responsible for children, it is so important to ensure that you provide for their education and living expenses if you are no longer around.
Virath Juggai, risk and estate planning specialist at Gradidge-Mahura Investments, explains that the exercise must start with a proper calculation of how much your estate would need to cover the costs of your child’s education.
This would be done by a financial planner who would assess the value of your existing assets, including your retirement funds, and whether this would be sufficient to provide for your children.
If there is not enough money between your investments and retirement funds, then you would consider some kind og insurance policy to cover your child’s education. This could take the form of life cover, or an education protection plan
One way of providing for your child’s education would be to purchase an appropriate amount of life insurance which would pay out a lump sum on your death (or if you are disabled).
Juggai says if there are minor children, or even young adults, you should consider instructing the life company to pay the proceeds into a testamentary trust. This is a trust that is provided for in your will; you can nominate a trustee to manage the funds in order to pay school fees and cover living expenses.
Some insurers, like BrightRock, Sanlam and Momentum, have an option where you can select to have the life cover paid out monthly rather than as a lump sum. This removes the need to manage the investment. You could decide whether to have the money paid to the guardian or paid into a testamentary trust.
Some companies offer needs-based insurance where the life cover is for a specific need or period, rather than whole-of-life. This means the life insurance premiums will end when your children are no longer financially dependent on you – for example, at the age of 25.
As Juggai explains, the liability, or cover required, decreases as your children get older. This means you would have lower premiums and lower escalations than if you purchased whole-of-life cover, making it more affordable.
It is important to note is that life cover forms part of your estate for estate duty. If your estate, including the life cover, is more than R3.5 million, a 20% estate duty would be paid to SARS on the amount above R3.5 million.
Education protection plan
There are several insurance companies that offer insurance specifically to cover education costs, in the form of an education protection plan. These include Discovery Global Education Protector, Liberty EduCator Xtra, and PPS Education Cover.
These policies do not pay out to the estate or guardian but pay directly to the educational institution to cover the school or university fees.
These policies can provide peace of mind that the money will be used for educational purposes. Another advantage is that unlike a life policy, these policies are not included in your estate for estate duty purposes. This is because you have not insured for a specific amount but rather a liability (the cost of school or university fees).
These policies base the insurance premium on your child’s age and expected education costs. For example, if your plan is for your child to attend a private school, the premium would be based on the cost of private school fees.
You can also select a plan that would pay for your child to attend an overseas university. However, these are limited to only a select number of universities which include high-profile institutions such as Harvard, Yale, Brown, Oxford, and Cambridge.
Juggai says the advantage of these policies is that you don’t need to have a trustee to manage the funds or worry that the money will be correctly invested to cover the costs of your child’s education.
However, these policies do come with terms and conditions which makes them less flexible. For example, if your child wants to postpone studying until a later time, they may lose their insurance payment. You may have a child who does not wish to study, or one who would rather have seed capital to start their own business.
Ultimately you need to discuss the various options with your family and financial adviser, and decide what works best for you. Work with an independent financial planner who can help you do the calculations and can get comparative quotes.
Also, be realistic. While you may hope that one day your child will graduate from Harvard, consider if that is what they want and whether they would achieve the academic results to qualify.
Three examples of an education protection plan
The three plans discussed below all pay the actual tuition fees as a lump sum annually directly to the institution up to a maximum specified amount. They also cover residential fees at a tertiary institution.
Fees are covered up to a maximum limit – this is adjusted by inflation each year. You can select government or private school options.
The cover usually includes extra expenses such as uniforms, stationery, textbooks, laptops, extra lessons, transport, and school trips.
Liberty EduCator Xtra
Liberty includes a cashback feature that comes into effect when the child turns 18. Policyholders can then reclaim the full amount of premiums paid for the benefit.
The cashback feature allows parents to reclaim the full value of premiums paid over the years for the benefit which could be used for further education, travel, or even a down payment on a car.
Discovery Global Education Protector
If you are a member of Vitality, you could also qualify for the University Funder Benefit. This benefit will pay towards university tuition even if you have not experienced a life-changing event like death or severe illness.
It funds up to 100% of your children’s tertiary tuition fees on the Private Global Education Protector and up to 50% on the Core Global Education Protector, subject to a maximum amount.
However, to reach the maximum, you would need to have taken the policy out when the child was under the age of five, and kept gold or platinum Vitality status.
PPS Education cover
PPS includes additional benefits, including an amount for the matric dance and a once-off lump sum to fund the purchase of a car. The cover allows up to two gap years between secondary and tertiary education and will allow one repeat year.
This article first appeared in City Press.