Education protection vs life cover

Maya Fisher French

24 JUN 2010, 07:53

4 min read

Discovery offers a life policy that pays purely for your children’s education should you become disabled, ill or die. The policy looks good: it pays out at private school rates and even covers overseas university tuition.

But I was not completely sold — what does the protection really cost you, and is it not just the same as calculating those future costs and increasing your existing life policy?

Discovery gave me the following comparison:

The maximum that the Global Education Protector would pay out for 17 years of education is R798 700 (see table below).

The premium for Global Education Protector for a two-year-old child is R107,29.

If we assume that the parent dies and the child receives R798 700, then the equivalent life cover premium would have been R118,17.

So in this particular example and under these assumptions, it works out to be slightly more efficient to take Global Education Protector than life cover.

Disadvantages

This assumes that you will die while your child has 17 years of schooling ahead of them. The longer you live the less capital you will need from a death benefit to educate your child. With ordinary life cover you can decrease the amount insured or lower the annual increases of your premiums, which is not the case with the Global Education Protector.

With life cover you can select premium increases of 0%, 10% or inflation plus 3%. However, with Global Education Protector the premium increases are determined by Discovery Life each year based on the increased cost of education. Herschel Mayers, Discovery Life CEO, says one can assume an annual increase of inflation plus 3% (9% at the moment).

You would not receive the full benefit if your child’s schooling was not as expensive, or your child does not go on to tertiary education and therefore does not utilise the full benefit.

Advantages

Trying to calculate how much schooling will cost 10 years from now could be risky if school fees rose more than expected. The policy carries that risk as the payouts are determined by actual school fees, not a predetermined rand amount. While R798 000 is how much education costs today, within five years that figure would have risen by at least 50%. That is the risk Discovery carries.

There was a case recently where a father had died and a year later the child needed to be moved to a remedial school, which was more expensive than the school he was attending, and the policy covered the schooling in full. This was a cost that the father was unlikely to have included in his life cover.

The Global Education Protector also provides the option for the child to attend one of the registered overseas universities at a cost of R950 000 for four years. In this scenario the total payout for 17 years of education would come to R1,6-million. You will be paying the same R107,29 premium for R1,6-million cover — the equivalent life premium is R238,89.

Once the Global Education Protector expires, it can covert to ordinary life cover free of underwriting.

Conclusion: a good product but review regularly
If you died while your children were still young, this product would provide a significant benefit, certainly more than you could provide in life cover for the same premium. But like all insurances, it is just a hedge against unfortunate events. You would be thankful if you lived long enough to see your children graduate, but would also be just as thankful if something happened to you and you had taken out this policy.

It would be a good idea to review the need for the policy once your children are in high school to decide whether to cancel the policy and opt to increase your life cover to pay for the remainder of their education. You will have to balance the increased cost of life cover at a higher age with the cost benefit of the education product.

Like all financial products, you need to review regularly to ensure that your policies still meet your objectives.