These are precarious times we find ourselves in and there really is no indication that the economic situation or the rest of it really will get better. For this reason, people are reasonably choosing to reduce their financial insecurity as much as possible as they plan for the future. Education policies offered by insurance companies have become one way for people to save for the future.
One woman did just that. She took out education policies for her two sons but for some reason her agent advised her to put one under her husband’s name. The husband agreed to it but said he would not make the payments. This should have been a red flag. A policy should be in the name of the person paying or the beneficiaries, in this case, the children for whom she was saving. Nonetheless, she kept making the payments for both policies. Fast forward a few years, they have divorced and the policy has partially matured. She goes to the insurer seeking to get the partial payment and is told she needs her ex-husband’s signature. Long story short, the school fee money ends up in his account and the man disappears with it. Her insurance broker then encourages her in the spirit of moving on to keep saving so that she can get paid when it matures. This time, the man takes a loan against the policy, gets it, and fails to pay it back. At the end of the day, the woman lost 13 years’ worth of savings.
Education policies are insurance products designed to help parents save school fees for their children. People usually get it when their children are really young and save for approximately ten years, sometimes more. When their policy finally matures at the end of the savings period, the saver is then given the lump sum of their savings and some interest. It’s not just for parents though, people who want to save but do not necessarily have children they are saving for can also get the policy and just use it to save.
Let’s consider the pros and cons of education policies as people continue to seek ways to save and invest in the uncertain future:
- Education policies can help you save consistently every month for important things like a child’s education. This can be a lifesaver given the high cost of fees, especially at the university level. It also helps to have a reminder every month to send your savings even if you are not doing it specifically for your children’s school fees.
- You can also get tax relief. This reduces the amount of tax you pay monthly. In Kenya, every resident individual is entitled to an insurance relief of 15% of the value of premiums paid, subject to a maximum of KES 60,000 p.a. The education policy must also have a maturity period of at least 10 years.
- Education policies are a poor long-term investment that pays out peanuts after years of saving. They claim to have competitive rates of return on investment but rarely do. They offer interests so low that they do not make financial sense as a long-term investment strategy.
- Depending on the policy if you miss payments you could start losing your savings held with them. Your insurer would in effect be punishing you for falling back on your payments because of tough economic times. People have harrowing tales about losing their jobs and then finding out their insurer had taken from their savings.
Some key lessons from the woman who lost 13 years’ worth of savings:
- Make sure your policy is in your name as the person making the payments or that of the recipients, in her case her children.
- Read the fine print and ask questions about the different scenarios such as what happens in an instance such as this woman’s case.
- Research, research, research before getting into these long financial relationships with insurers. Insurance brokers and salespeople are paid on commission, so all that matters to them is that you sign the dotted line. They have no incentive to reveal the concerning features of the policy. That means it’s up to you to research, research, research, and listen to people’s experiences regarding different products.
According to some financial advisers, you are better off opening a savings account and saving there as opposed to using an education policy or whatever other insurance product marketed purely as a savings or investment scheme. There are also groups like chamas that can help you save consistently and keep you accountable with better returns and lower risks than an education policy or insurance product designed for saving. Financial advisers say you could then get a solid policy like a health insurance cover or a life cover to accompany your savings and have you covered in case of a rainy day. It’s a question of buying the right insurance product.