Saving For Your Child's School Fees: Education Insurance Policy vs MMFs

Planning for your child's education is one of the most critical aspects of financial planning. As education costs continue to rise yearly, finding a way to cover these expenses has become more vital than ever. 

Starting to save early can provide numerous benefits, such as avoiding HELB loan debt, taking advantage of compound interest, and providing financial peace of mind. A well-thought-out plan ensures that you can afford tuition without financial strain when the time comes.

There are various ways to save for your child's education, each offering unique benefits depending on your goals and financial situation. 

Among these options are Education Insurance Policies and Money Market Funds (MMFs). This article will explore and compare these two savings vehicles, evaluating their benefits, drawbacks, and suitability for short-term and long-term education savings goals.

Read Also: How to Raise Money-Smart Kids: Practical Tips for Every Age!

Using Education Insurance To Save For Your Kid’s Education

Education insurance is a specialised policy designed to help you save and secure funds for your child's education. These policies not only provide a savings plan but also offer insurance coverage, ensuring that your child's education needs are met even in the case of your untimely death or disability. 

Typically, there are two ways of investing in an education policy: 

• Buying Endowment Plans: These are savings-oriented policies that pay out a lump sum after a specified term or upon your death. Depending on your insurer, you can withdraw some of the sum assured before maturity. 
• Buying Whole Life Policies With Education Coverage: These provide coverage for your entire life and often come with education coverage. Typically, you, the parent is the policyholder, and the child is the beneficiary, ensuring the child's future is secured. 

How Education Insurance Works in Kenya

First, you select a reputable insurance company, considering its financial background, claim settlement ratio, and customer reviews.

Once you've chosen an insurer, you determine the sum assured, which is the guaranteed amount your child will receive at the end of the policy term or in case of your untimely death or disability. This amount depends on your premium payments and the policy terms.

After signing up, you begin making regular premium payments, which can be monthly, quarterly, or annually. The insurer invests these premiums to generate returns, ensuring the growth of the education fund over time.

The policy specifies payout milestones in your child's education journey, such as the start of high school or university. The insurer disburses a lump sum or regular payouts to cover education costs at these milestones.

In the event of your death or disability, the policy ensures continued savings or an immediate payout to cover your child's education costs, providing financial security.

When purchasing the policy, carefully review the terms and conditions, including premium amounts, sum assured, payout structure, and any additional riders such as critical illness cover, waiver of premium, or accidental death benefit.

Education insurance is designed to accumulate funds over a period, typically aligning with significant educational milestones. Payouts are also made when the policy matures. For these reasons, they might benefit parents who start saving early. 

Read Also: How to Save For Your Child’s Education By Age 

Pros and Cons of Education Insurance

Pros:

1. Guaranteed Savings: Ensures funds are available when needed for your child's education.
2. Insurance Coverage: Provides financial security in case of your death or disability.
3. Tax Benefits: Offers tax deductions on premiums paid. For policies with a maturity period of at least ten years, you'll be entitled to an insurance relief of 15% of the premiums paid, subject to a maximum of Ksh60,000 annually.
4. Disciplined Savings: Encourages regular savings towards education goals.

Cons:

1. Cost: Premiums can be high, especially for comprehensive coverage with short-term maturity.
2. Limited Liquidity: Funds are typically locked in until the end of the term, and early withdrawal may attract penalties.
3. Investment Risk: Depending on your policy and insurer, if you miss payments you could start losing some of your savings held with them. 
4. Complexity: Understanding the policy terms and conditions can be complicated.

Saving For Your Kid's Education Using a Money Market Fund (MMF)

A Money Market Fund (MMF) is a type of mutual fund that invests in short-term and low-risk securities like treasury bills, fixed deposits, commercial paper, and high-quality corporate bonds. MMFs aim to provide investors with high liquidity, capital preservation, and a modest return on investment. 

MMFs pool money from multiple investors to purchase a diversified portfolio of short-term financial instruments. The returns generated from these investments are then distributed to the investors. Investors can typically access their funds quickly, often within a few business days.

Leveraging MMFs as Sinking Funds for School Fees

Sinking funds are savings set aside for specific future expenses. MMFs can be an excellent vehicle for this purpose due to their liquidity and relatively stable returns. Here’s how you can leverage MMFs as sinking funds for school fees:

• Determine Your Goals: Calculate the amount needed for upcoming school fees and the timeline for these expenses.
• Regular Contributions: Set up automatic transfers to the MMF, contributing regularly to build the fund over time.
• Reinvest Returns: Allow the returns generated by the MMF to compound by reinvesting them into the fund.
• Withdrawal: When school fees are due, withdraw the required amount from the MMF, ensuring you maintain some balance for future expenses.

Unlike education policies, where funds are locked in until the policy matures or specific conditions are met, MMFs are highly liquid and allow quick access to funds. MMFs also don't require long-term commitment with regular premium payments. For these reasons, they can benefit parents looking to preserve fees they've already saved or those saving for next year's fees. 

Pros and Cons of Using MMFs to Save For Your Child's Education

Pros:

1. High Liquidity: MMFs allow you to access your funds quickly, providing flexibility to meet unexpected education-related expenses without liquidating long-term investments.  
2. Flexibility: You can adjust your contributions to MMFs based on your current financial situation. Unlike in education policies, there are no penalties for withdrawing funds, and you can increase or decrease your investment as needed. 
3. Better Returns: MMFs typically offer higher returns than traditional savings accounts or fixed deposits due to their investment in short-term, high-quality securities. 
4. Ease of Management: MMFs can be managed online with automated contributions and withdrawals. This simplifies the process of saving, ensures consistency in your savings plan, and gives you more control over your savings. 
5. Low Entry Barrier: Many MMFs have low minimum investment requirements, allowing you to start saving with a modest amount. 

Cons

1. No Insurance Coverage: Unlike education insurance policies, MMFs do not provide any life or disability coverage. 
2. Fees: MMFs charge management fees, which can reduce the overall returns on your investment. 
3. Returns Not Guaranteed: Unlike education insurance policies, which often offer guaranteed returns upon maturity, MMF returns can vary based on market conditions.
4. Interest Rate Risk: Exposure to interest rate fluctuations can lead to inconsistent or low returns, complicating school fee planning. 
5. No Tax Reliefs: MMFs do not offer tax benefits, unlike education insurance policies, which may provide tax deductions on premiums paid.

Read Also: What is the Best Way to Invest For Your Child's Education? 

5 Things to Consider When Choosing Between MMFs and Education Policy 

Choosing between money market funds (MMFs) and an education insurance policy requires careful consideration of various factors to ensure you make the best decision to save your child’s school fees. Here are essential aspects you need to consider:

1. Amount You Want to Save: 

Determine how much you can comfortably commit to saving. MMFs allow you to start with a relatively small initial investment, making them accessible even if you don’t have a large amount to invest upfront. 

Education policies often require fixed, regular premiums, which might be higher depending on the coverage and benefits you choose. Committing to these fixed premiums can be a burden if your financial situation fluctuates. 

2. Your Saving Time Horizon and Your Child's Age: 

You will need to align your savings plan with your child’s age and the time until the expenses are due. MMFs can be versatile for both short-term and long-term goals. If your child’s education expenses are approaching soon (e.g., within a few years), MMFs offer the necessary liquidity. 

For long-term goals, they can still be effective with consistent contributions. On the other hand, education insurance is generally designed for long-term savings, typically maturing when your child reaches significant educational milestones. 

3. The Level of Control You Want Over Your Savings: 

MMFs might offer high control over your investments. You can choose when and how much to invest and withdraw funds. This control also extends to adjusting your investment strategy based on market conditions. 

Once established, education policies are less flexible. You commit to a premium payment schedule and may not have much say in how the funds are invested. 

4. Liquidity, Accessibility, and Flexibility: 

MMFs are known for high liquidity and flexibility. You can access your funds quickly, usually within a few business days, without penalties for early withdrawal. 

Education policies are less liquid, with funds typically locked in until the policy matures. Early withdrawals can lead to penalties and reduced returns, making them less flexible in terms of access. 

5. Additional Benefits: 

MMFs typically offer no additional benefits beyond the returns on the investments. They focus solely on growing your savings with modest risk. 

Education policies often come with additional benefits such as life insurance, disability coverage, and sometimes even a premium waiver in case of the policyholder’s death or disability. 

Read Also: Every Young Parent’s Struggle: Funding Children’s Education 

WRAPPING UP 

When it comes to saving for your child's school fees, both Education Insurance Policies and Money Market Funds offer distinct advantages and challenges. Your specific financial situation, goals, and preferences should guide your choice.  

Start researching and comparing your options early. Educate yourself about the different saving vehicles available and how they align with your financial goals. The earlier you begin saving, the more you can take advantage of compound interest. It also allows you to spread your savings over a longer period, reducing the financial strain. 

Your financial situation will likely change over time. Be flexible and adjust your savings plan as needed. Additionally, If you have or plan to have more children, factor this into your savings plan. Each child's education will require resources, so plan accordingly to ensure that all your children have access to the funds they need for their education.