By Arno Jansen van Vuuren
Ismael was a great dad, read the Facebook post. Past tense – because at the relatively young age of 45, Ismael suffers a stroke, leaving his wife Nabilah and two young children behind.
While Ismael is a fictional character, how this story unfolds reflects the sad reality for many South Africans, where the needs of the majority tend to exceed the means. Ismael had done everything in his power to look after his wife and little ones; including taking out a life insurance policy to ensure his family would be provided for and his kids’ education would be covered in the event of his death. But, like many South Africans, the family had also racked up some debt. So when the life insurance lump sum was paid out, Nabilah soon found that the bulk of the funds were swallowed up by estate duties, taxes, and the settlement of debt, with a paltry amount left over for their children’s tuition.
But an alternative exists, thanks to the emergence of a new type of needs-based insurance. Education insurance offers the policyholder comprehensive cover that is ring-fenced to provide for their child’s education-related needs, ensuring that funds do not get swallowed up by debt and other expenses, or mismanaged down the line.
Ismael can purchase education cover for a couple of hundred rands a month, which provides his family with a guarantee that should he pass away, his children’s education expenses will be covered from primary school up until college or university; until his children reach the age of 22.
Education insurance is typically more affordable and accessible than traditional life insurance.
Three reasons why you should consider education insurance.
1. Life insurance or savings alone might not cut it.
Life insurance pays out a pre-defined lump sum in the event of death, critical illness, or disability. The unfortunate reality is that in South Africa, these funds are all too often swallowed by debt and basic living expenses, with little left over for education.
Education savings are another critical component of protecting your child’s future, but in order to meet these costs plus inflation, you would need to consistently save around R2000 a month from the time your child is born until they reach varsity. Every month you delay or miss sets you back significantly, for many people, this is simply not feasible.
Some regard school or college fees as part of their monthly budget, allocating a portion of their earnings to cover these expenses. This is a good idea, but should something happen to you or impact your ability to earn a living, you want to ensure your child’s tuition is not affected.
Ultimately, life insurance and savings are important tools in protecting your dependants, and a balanced financial plan will make provision for this. But as most parents will tell you, their child’s education is paramount, and guaranteeing it against all eventualities is a vital piece in the puzzle.
2. There’s no risk of mismanagement or funds being used for non-education needs
The other risk with a lump sum being paid to your appointed beneficiary when you pass away is that it places a huge burden on the beneficiary, who would need to manage and reinvest the funds while allocating the necessary portion to schooling.
Education insurance pays the funds directly to the schooling institution each year until your child turns a certain age, so there is no administrative burden or risk of the funds being directed toward other expenses.
3. Some education insurance providers offer immediate benefits
While insurance is important but often considered a ‘grudge’ purchase (because who actually wants to think about dying?) some providers offer more immediate value, in the form of cash-backs and value-added benefits.
Any financial adviser worthy of the title will always tell you to take care of the risks first. Start with ensuring you and your family are protected and the things most important to you, like your children’s education, are covered – and then focus on savings and building wealth.
* Jansen van Vuuren is the managing director at Futurewise.
PERSONAL FINANCE