A guardian or parent has to choose an education plan that can provide safety, preservation and growth, as well as fit into their investment objectives. The following are key factors to consider:
- Individual Profile of the Investor: This refers to the different and unique characteristics each parent/guardian has.
The age of the beneficiary is an important factor to consider before making any investment decisions as it affects both the time horizon of an investment that you are willing to take. Time horizon refers to the time in which one intends to save with the plan, for instance a couple with a young child choosing to invest in longer education plans will be more willing to take up higher risk than individual saving to do a masters in three years. A longer tenor affords the couple the opportunity to have a more aggressive portfolio as they have more time to recover any lost potential returns. It is also key for guardians to profile themselves based on the financial goals they hope to achieve with the Education plan. If they want to invest for a short period they should consider other investment vehicles whereas if they would like a longer-term investment, then education investment plans are the best option for them. - The Issuer of the plan: When seeking an Education plan provider, it is important for one to do their due diligence on the plan provider. This will enable the investor to not only familiarize themselves with the products offered by the issuer, but also the returns they stand to gain should they decide to invest in their Education policy. Key to note, Education plans are often long-term investments that are hard to get out of, therefore one should think about whether to buy an insurance-based product or an investment manager based product. An important practice is to consult individuals who have already bought such plans and get to hear their experiences, as well as qualified financial advisors who are familiar with the product.
- The prevailing and future Inflation outlook: In order to preserve the strength of your education savings, it is important that you save in a plan that offers above-inflation interest rates, given that inflation erodes your purchasing power and will reduce the value of the final payout. Therefore, the guardians should ensure that they save their money with an issuer who offers returns significantly higher than the inflation rates.
- Additional Benefits that come with the plan: Most education plans are provided by insurance companies who offer their education policies with the additional benefits of life cover which is sometimes subject to payment of an additional premium. Life insurance serves to provide financial protection to the loved ones left behind. The guardian may also choose to have the education plan and the life cover separately with different firms.
- Early Redemption: One key area that an education policy client should note is that as a medium-long term investment, it is difficult to have frequent and easy access to all of your funds anytime you wish. In education policies offered by insurance companies, there is a term known as surrender value (the amount that one stands to be paid should they wish to withdraw early on in their policy before maturity), and this value is usually significantly less than the aggregate contributions. However, there is an option referred to as ‘Paid up’ that allows the client to halt their monthly contributions without incurring any penalties.
Key to note, this is only an option if you have already built up a significant cash value in your insurance plan. To put this to perspective, we shall take an example of an Education Plan offered by a market player, ABCD education policy: For this policy, the minimum tenor is 5 years; however, for a client who has faithfully contributed either every month/ quarterly/ semiannually/ annually for 3 years, they are offered the Paid-Up option. If they choose this option, for the remaining 2 years, their money will continue earning interest but they will not be required to contribute.
Source: Cytonn Investments
