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During September, which was “wills month”, there was a focus on estate planning and drawing up your will, especially when children are involved. It is equally important to ensure there is enough money in your estate to provide for your child’s education and living expenses if you are no longer around.
Virath Juggai, risk and estate planning specialist at Gradidge-Mahura Investments, explains that the exercise must start with a proper calculation of how much your estate would need to cover the costs of your child’s education.
READ: Personal Finance | How to use your beneficiary fund to provide for your child
If there is not enough money between your investments and retirement funds, then you would consider an insurance policy.
LIFE COVER
You could purchase an appropriate amount of life insurance which would pay out a lump sum on your death (or if you are disabled). Juggai says, if there are minor children or even young adults, you should consider instructing the life company to pay the proceeds into a testamentary trust.
Some insurers, such as BrightRock, Sanlam and Momentum, have an option for the life cover to be paid out monthly rather than as a lump sum. This removes the need to manage the investment and you could decide whether to have this amount paid to the guardian or into a testamentary trust.
Some companies, such as BrightRock, offer needs-based insurance, where the life cover is for a specific need/period rather than whole-of-life. This means the life insurance premiums will end when your children are no longer financially dependent on you – for example, at the age of 25. As Juggai explains, the liability, or cover required, falls as your children get older. This means you would have lower premiums and lower escalations than if you purchased whole-of-life cover, making it more affordable.
EDUCATION PROTECTION PLANS
There are several insurance companies that offer insurance specifically to cover education costs. These include Discovery global education protector, Liberty educator xtra and PPS education cover.
These policies do not pay out to the estate or guardian but directly to the educational institution to cover the school or university fees.
READ: Money Makeover | When your retirement fund is not enough
These policies can provide peace of mind that the money will be used for educational purposes. Juggai says the other advantage is that, unlike a life cover policy, these policies are not included in your estate for estate duty purposes. This is because you have not insured for a specific amount but, rather, a liability – cost of school fees.
These policies base the insurance premium on your child’s age and expected education costs. For example, if your plan is for your child to attend a private school, the premium would be based on the cost of private school fees.
Juggai says the advantage of these policies is that you do not require a trustee to manage the funds or worry that the money will be correctly invested to cover the costs of your child’s education. However, these policies do come with terms and conditions, which makes them less flexible.
For example, if your child wants to postpone studying until a later time, they may lose their insurance payment.
Ultimately you need to discuss all the various options and what works best for you and your family. Work with an independent financial planner who can assist in doing the calculations and obtaining comparative quotes. Also, be realistic: While you may hope that one day your child will graduate from Harvard, consider whether that is what they want and whether they would achieve the academic results to qualify.
