Education policies an easy sell as tuition inflation soars

The soaring cost of education creates many opportunities for financial advisers. We asked some of the industry’s large insurers what products they offered in the education space...

More and more parents are starting to realise the importance of saving for their children’s education. Parents want what’s best for their children and know that giving them the right tools to get ahead could ultimately determine their success in life.

The right savings vehicle

“Investing in education is important, but what isn’t always clear is which saving vehicle is the right one to suit your individual needs,” says Jaco Gouws, Product Marketing Actuary for Old Mutual South Africa. “Things to consider include whether you’re saving for school tuition or tertiary education, how long you have to invest and how much you can afford to save!”

Research has shown that many parents ‘invest in their mortgage bonds’ to hopefully cover the cost of tertiary tuition. “While this is potentially a good investment, few have the discipline to earmark a certain portion of their access bonds for education purposes and more often than not this is used for renovations, a holiday or a down payment on a new house,” says Louis-Minnie, Head of Investments Customer Value at Liberty Life.

The traditional endowment

There are plenty of savings products you can recommend to your client. An endowment is a safe option and allows a more structured approach to saving, especially for those who may be tempted to access their funds for other reasons. The product offers a minimum investment period of five years and a maximum of 15, with the option to reinvest. Unit trusts are also popular because your clients have immediate access to their savings and have exposure to market related growth with the potential for higher yield returns.

“Old Mutual Max Investments has various options that could suit your client,” says Gouws. “We like this product range because you can choose the product wrapper that is most tax efficient for your client and starts from as little as R250 per month."

What about education-specific products?

Jaco Coetzee, General Manager of Sanlam Financial Advisers says the group offers a number of educational policies, including Sanlam Stratus EduFocus and Sanlam Save to Study. Liberty Life offers an Education Builder policy while Metropolitan Life offers an Education Plan.

Difficult to measure

Are enough people buying these policies? And is there a trend toward saving more for education? “One can’t only look at the sales of education policies to determine how many clients actually save for the education of their children,” says Coetzee. “One has to look at the sales of all recurring savings products… So, for example, we can see that the sales of new saving premiums in 2011 increased with 23% in comparison to 2010.”

The consensus, however, is that not enough clients are buying educational policies. Louis-Minnie says that ideally every parent should have some sort of dedicated investment in place aimed at education. “In practice this is not the case and accumulation of debt is often required to put kids through school and university,” he says.

The role of the adviser

Financial advisers have an extremely important role in reminding their clients’ of the importance of saving for education. “This is a need that is covered in every comprehensive needs analysis which Sanlam Financial advisers do on a regular basis,” says Coetzee. Louis-Minnie agrees: “There is a very robust advice process that advisers subscribe to, and part of this is a needs analysis. Advisers will thus shed light on the customer’s education needs at this stage, though it is up to the customer to commit to such an investment policy.”

Metropolitan conducts a confidential customer needs analysis with clients, including saving towards an education either for themselves or for their children. “Sometimes the customer will opt for a more generic savings offering that would cover a multitude of needs, and not just specifically education savings,” says Quintin Augustine, Head of Product Development, Metropolitan Life. “The way our education plan is structured allows the customers to withdraw funds (to a certain limit) to pay for various school or university requirements before the policy matures. We encourage customers to consider this option because it is specifically designed to meet their education needs.”

Meeting expectations

One of the concerns is that education policies fall short of fully funding the intended course. How can an adviser make sure their clients’ children are adequately provided for? Coetzee says the effectiveness of an education savings plan hinges on four factors, namely how much a client can afford to save, how early a client begins their savings effort, the cost of the course being saved for and the duration of the course. “Advisers are able to calculate for their clients how much they need to save to ensure that the proceeds of the policy will be enough to cover the full costs of the specific course,” he says.

Augustine pointed out two common factors that impacted on the maturity value of an education policy. “Given the tendency for clients to delay the purchase of an education policy and fairly low levels of affordability, it is quite likely that the maturity funds would not be sufficient to cover the full cost of putting their child through a tertiary institution,” he said. “We encourage customers to start saving as soon as possible to maximize the value of their contributions over time, by benefiting from the compounding effect of interest."

Minnie says shortfalls often occur due to the client saving less than their financial adviser recommends. “Provided your client sticks to the plan and you review it regularly chances are that you will save enough for your child’s full education,” he says.

Rampant inflation

Inflation must be factored in too. Many clients prefer not to increase their premiums during the term of the policy to buffer against the effect of inflation. But tuition fees increase on average 10% every year! “To grow your wealth, it is important that you increase your savings every year by more than the inflation rate. If you start saving from the day your child is born, your initial premiums will be lower than if you start later. They will be lower still if you opt to increase the premium with education inflation every year,” says Gouws. He reminds us that a 13-year public education probably costs in the region of R320 363, while a general university degree costs R38 250 per year in today’s money.

It is extremely difficult to provide adequately for education. A parent would have to save approximately R3 807 per month (from date of birth) to send one child to private school and university for a three year business degree. And you have to increase this contribution in line with inflation each year. “It’s never too early to start planning for your children’s education. Especially since their future may depend on the financial decisions you, as parents, make today,” he concludes.