If you ask many Kenyans of one of their worst investment decisions they have ever made, buying education insurance policies will probably be one of them.
And I won’t blame them. Insurance education policies are a bit too complex to understand for the average person and are sold by seasoned sales men(insurance brokers)
Buying an education insurance policy seems like the best investment for you and your children until you do the math and look at other alternatives.
I’m not here to convince you that Life Insurance is not important. We all know it’s important and insurance is a product of wealth protection, not wealth creation.
But Insurance companies somehow managed to come up with a clever product that can easily sell, mixing insurance and saving for your children’s education.
In this article, we’ll discuss what Education Insurance policies are, why you shouldn’t waste your money investing in them, and other better alternatives.
What Are Education Insurance Policies?
An Education Insurance policy is a life insurance product specially designed as a savings tool to provide an amount of money for your child’s education.
It provides a payout on the death or disability of a parent while the child is still in school or matures when a child is set to go to school. In this case, college or university.
What Makes Education Insurance Policies Look Like They Are Good Products?
1. High Education Cost
As a parent, you want the best for your children, hence the thought of safeguarding your children’s education isn’t an option but a necessity. But just because you are thirsty, you shouldn’t drink from any cup.
Some parents imagine that they may be unable to pay for their kids’ education because of low incomes or even the uncertainty of their jobs.
This leads them to signing up for education policies so that they may safeguard their children’s education.
2. What Will Happen To Your Kids When You Die?
An Insurance Education policy serves two purposes. It provides insurance and a savings plan. So Insurance agents will instill fear in you that when you die, your children may not be able to continue with their education.
While that is a worthy risk to worry about, there are better plans to cover yourself against the risk of death, disability or chronic illness. That’s the purpose of insurance. And when Insurance is taken independently from an education policy, it becomes cheaper and more useful as my Friend Agatha from The Wealth Tribe Shows here in this detailed Breakdown
3. Insurance Agents Promise Huge Compensation
The possibility of getting a few millions in compensation at the end of 15-20 years is staggering for most people. This makes them think that joining an education insurance policy is a good plan while they are literally missing out on better investment opportunities.
It’s not that you are getting huge money, you are just getting your contributions back with a little percentage on top.
Here I will give a few examples from what people have shared with me. The names used in these examples aren’t real names.
Ochieng has an education insurance policy where he contributes sh 3750 per month for 10 years. His sum assured is sh 316,000 with bonuses. His bonus is sh 9500 per year for 10 years. The bonuses of sh 63,000 are paid in years 3 and 6 respectively.
If you do the math, he receives the same money as compensation as what he has contributed. That is if he lives to the end of the policy.
Why Education Insurance Polices are Poor Products?
1. They Mix Insurance, Savings & Investments in one basket
This is one of the worst designed products in my opinion, and the main beneficiaries are the insurance companies and not the policy holders.
Wealth creation and wealth protection are two different things that ought not to be mixed. Wealth creation is for growing your wealth. You invest in asset classes like Money Market Funds, Stocks, Real Estate, Treasury bonds. Your main goal is to grow your wealth, so you are chasing returns that beat normal inflation rates both in the short term and long term.
Wealth protection on the other hand seeks to protect you and your loved ones from losses. This is where insurance comes in. We get medical cover so that if we got sick, the cover would help us get treatment without having to sell off our assets or raise funds to offset our medical bills.
Life insurance also protects our loved ones in case we get chronic illnesses, disability or death. The goal is not necessarily to maximize returns but to be protected from risks that we face everyday.
2. They Promise You Higher Returns Which Are Actually Low Returns
If you do the math of the amount you get from an education insurance policy, you will realize that what you are getting back is just the amount of money you saved with very little interest. As you can see from the example above, these policies have very low returns. In a competitive environment like we are in right now, where inflation is very high and capped at 7.5% on normal economic times, we should be investing for our kid’s education in asset classes that fetch high returns.
3. They Lack Flexibility
In case you missed paying premiums for sometime or canceled the policy before maturity, this comes with heavy penalties. Remembering that most Kenyans are in and out of employment and this policy is long term, it would be wise to have something that is more flexible just in case you lost your job and you were unable to continue paying the premiums.
Rethinking Investing for Your Kids’ Education
If you want to save for your kids’ education, you want something flexible, that you can top up whenever you have extra money.
More so, you want to be guaranteed that you will be able to afford your kids education either in your presence or absence.
You’d also want to save or invest this money in a good asset class that fetches decent returns so that you can take advantage of the compound interest that will accrue in the long run.
Instead of investing your money in poor products like education insurance policies, you can create a portfolio of different, low risk assets where you save for your child’s education. For example, you can start saving in a Money Market Fund. It offers you good interest, flexibility to deposit any time you have extra savings, and you can start or top up with any amount.
As you accumulate more money, you can then move some of this money to other asset classes that have higher returns in the long run like Bonds and Exchange Traded Funds. They are low risk, and have decent returns.
The good thing about this plan, is that you will not only use the money to finance university or college education for your child but you can use it as from secondary school, depending on your savings and the number of children you have.
Education insurance policies are for the financial illiterate, and people who have no savings discipline. If you are wise enough to do the math and build your own portfolio to support your kid’s education, you will realize that the education policy is a very poor thing to put your money in.
If you want insurance, go and get insurance, if you want to invest or save for your kids education, look for asset classes with decent returns and are low risk.