For most parents, providing their children with the best education they can afford is a number one priority. The proliferation of private schools in South Africa is testimony to this fact.
According to a survey quoted on last year, in the ten years between 2000 and 2010, private schools saw a 76% increase in enrolments . But the costs can be exorbitant. Without taking into account pre-primary school or tertiary education costs, the primary and high school fees for a single child could cost you in the region of R400 000 for a public school and over R1 million for a private school over 12 years.
Parenting magazines are filled with adverts for financial products that can help – but finding your way around the different options can be daunting. Here are five questions to ask your financial adviser when discussing how best to provide for your children’s education in your financial planning.
1. Is the policy you’re discussing a savings plan, an investment or a life insurance policy? Many parents set aside money in a bank account every month to save up for their children’s tertiary education. Others invest funds in an education savings plan or investment policy, where the funds are invested in unit trusts or other investment vehicles that can potentially earn them higher returns than just the interest they’d earn in a normal savings account.
But parents should also consider education as a specific financial need when structuring their life insurance policy, says BrightRock’s Executive Director: Marketing, Suzanne Stevens. Through their life insurance cover, parents can make specific provision for the costs of their children’s care and education should either or both parents no longer be able to support their children financially because of an illness, injury or death.
2. If it’s a life insurance policy, does it offer indemnity cover or stated cover? Some life insurance policies that cater specifically for education offer indemnity cover. This means the pay-out will be made directly to the specific education institution, proof of the actual expenses will be required and the insurer can set a maximum limit on the pay-out. Usually, with these policies, there’s cross-subsidisation – so the premiums of clients whose children have lower school fees subsidises those with higher school fees. Other policies offer stated benefits. In this case, the person taking out the cover can choose the pay-out amount based on what they can afford, with no cross subsidisation. The pay-out will be made directly to the client or their beneficiaries – not to the institution. And there’s no need to provide proof of the actual expenses.
3. How will cover grow over time? Consumer inflation (as measured by the Consumer Price Index or CPI) is the rate at which costs for household goods go up every year. But education costs tend to go up a lot faster – growing at between 2% to 3% more than CPI yearly. It’s important to check whether your cover will be growing to keep up with these rising costs. If you take out cover that grows at CPI only, you could face a big gap – as much as 30% – between the pay-outs you receive and the actual costs of your child’s education.
4. Does it provide only for education? School fees aren’t the only expenses you need to think about providing for. Over and above costs like uniforms, books and stationery, you also need to think about food and transport costs, sports equipment, extramural activities and all the other costs that go hand in hand with raising a child. It’s crucial that you and your adviser think about all of these expenses, so you know your children are fully provided for if something should happen to you. If the education policy you’re taking out caters only for education costs, you need to ensure you’ve provided for all these other expenses elsewhere in your financial plan.
5. When will the cover end? It’s important to consider how long you want to provide this cover for. Some parents expect to provide for their children only until they reach the age of 18 years or the age of 21 years. Other parents may wish to provide for their child until they reach financial independence. If your child plans to go to university, they may only enter the working world at the age of 24. So check when the cover will end. And if you do plan to make financial provision for cover until your child finishes their tertiary education do, make sure you take account of the significant jump in costs you may experience when your child makes the transition from school to university. It’s not just the fees that may increase, but other costs like transport and accommodation if your child will be studying away from home, for example.