The Truth About Education Insurance Policies In Kenya + The Best Education Plan For Your Kids

The truth about education insurance policies in Kenya

Written by Agatha

June 14, 2022

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I’m writing this article out of spite. Back in 2018, I worked for a Brain Training company. Since 90% of our clients were kids, we would attend education fairs to market our services. As you would expect, insurance companies also flocked the fairs to sell their Insurance Education Policies/Plans.

At one such fair, I met a man from one of the insurance companies who identified me as a potential investor for one of their savings & investment products. I can’t remember the details of the product but one key characteristic that stood out to me was that I could invest as low as 70 shillings per month.

I was really tempted to sign up but if you’ve been reading this blog long enough, you know that those were the times when I was the queen of debt (mobile money loans): I lived life on the edge.

As is the custom with insurance agents, he got my number, forced me to tell him when I thought I’d be in a financial position to start investing and marked his diary to call me on said date.

True to his word, (they never fail!😂) he would call or text me every 3 months to check if I was in a better financial position to start investing. I always turned him down. After 2 years, he gave up.

Or so I thought!

Late last year (2021), he sent me a message on WhatsApp…

Hi Agatha, 

I’m sure you’re now either married with your first child or two or are ready to start having kids. We have a new Education Insurance Policy that I’d love to introduce to you.

Do let me know when I can call you.

Is that supposed to be a sales pitch that leads to a sale? I can’t begin to describe how angry and offended I was.

So, yes. I’m writing this article to help you plan better for your children’s education and also to spite such insurance guys that we love to hate.

Before we spill the beans, allow me to invite you to:

 

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But…

 

How much does that Masterclass cost?

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What is An Education Insurance Policy?

 

An Education Insurance Policy is a unit-linked fund.

Unit-linked means that: a portion of the premium you pay goes towards providing you with insurance such as in the case of premature death, while the other portion is invested in a fund (unit trust) managed by the insurance company.

A unit trust is a type of Collective Investment Scheme (CIS).

Unit Trusts are “investment vehicles made up of a pool of money collected from many investors governed by a Trustee Act.”

Investing in Money Market Funds in Kenya

As shown in the flow chart above, there are different types of Unit Trusts and the most common type of Unit Trust in Kenya is the Money Market Fund.

Before we explore how Insurance Education Policies work In Kenya, let’s start with a list of the lies that insurance agents sell you 😂

 

Lies that Education Insurance agents sell you:

 

For most of us, investing is characterized by two emotions: fear & greed. These two emotions get exacerbated when parents think of the future of their children.

And as expected, Education Insurance agents bank on these emotions to sell you the education plans.

 

1. High cost of education

 

Despite Kenya having one of the highest literacy levels in Africa (81.5%), the cost implication is still the biggest constraint to accessing quality education. Apart from tuition fees, parents also have to contend with other costs such as books & other reading materials, transportation, exam fees, boarding fees etc.

And it’s true, the cost of education, especially higher education, gets expensive by the day.

Education insurance agents use this fact to sell the policies to parents as a way to get them to save and invest with the goal of securing their children’s education.

Using a practical example, we’ll see later that using Education Insurance Policies is NOT an ideal way to plan for your children’s education.

 

2. The increasing cost of living (inflation)

 

Education insurance agents will tell you that since the cost of living is rising by the month, you’re better off taking up an Education Insurance Policy to guarantee that you’ll at the very least be in a position to fund your children’s education in future.

I’m sure you’ve been feeling the extreme rise in the cost of goods and services for the last couple of months…as shown below, the inflation rate in May 2022 rose to 7.1% from 6.5% in April!

May 2022 inflation

The inflation bit is not debatable. However, taking up an Education Insurance Policy is almost always NOT a good way to protect yourself against this risk.

If I were you, I’d choose an option that beats inflation!

 

3. What if you spend the money?

 

This is another major fear these agents love to use.

As I was researching for this article, a friend pointed out that the Education Plans come in handy for the financially indisciplined-just like merry go rounds 😂

But does this mean there’s no workaround to this challenge? There are many! For example, you can: 

 

  • Automate the process by setting up a standing order.

A standing order is a regular fixed payment made on a specified date to another account.

In this case, the standing order will be paid automatically into your children’s education fund, whichever amount you choose, every month before you have access to your salary.

Automation is one of the biggest hacks to attaining financial freedom faster. 

 

  • Have an accountability system.

 

This could be your friend, relative, spouse or a financial coach ( me 😊)

 

4. What would happen to your kids when you die? 

 

Death, sometimes untimely, is inevitable. It’s one of the risks that you’re exposed to on a daily basis.

You should, therefore, make a list of all the insurable risks that you’re exposed to and cover yourself against them.

For death, you should arrange for compensation by getting Life Insurance, which we’ll discuss later in the article.

Insurance is a key component of the financial planning process.

 

5. What if you lose your job? 

 

This is another risk that most of us are exposed to.

A way to cover yourself against it is by having a 6 months (or more) emergency fund invested in a Money Market Fund.

 

6. You get FAT bonuses!

 

Greed, is that you?!

Bonuses are declared periodically (e.g. every year) to policyholders. Once the bonus is declared, it becomes guaranteed, in addition to the final benefits.

When declared, the bonus, which is a percentage of the sum assured, becomes guaranteed.

Sum assured is the amount of money payable to your next of kin in the event of premature death.

The sum assured is also the basis upon which the premium is calculated.

But, what these agents don’t tell you is that the insurance company retains the discretion to fix the bonus rates. 

As we’ll see later,  the promise of bonuses is a trap. You’ll still end up with more money, even with the bonuses that they promise if you opt for other ways to invest in your children’s education.

 

7. You’ll get a Tax-relief!

 

In Kenya, Education Insurance Policies/Plans get you a tax deduction of 15% on premiums paid, with a cap of Kes. 5,000 per month (Kes. 60,000 per year).

As we’ll prove later, this benefit is a big price to pay for the steep difference in the total return between Education Insurance Policies and other investment options.

Plus, you can get the same tax relief with a Life Insurance Policy.

 

8. You’ll get payouts before maturity

 

Raise your hand if this sealed the deal for you 😅

Since the investment period for these Education Insurance Policies is long-term (5 to 20 years) the agents promise to give you some payouts a few years before maturity. Very enticing! (again, greed)

The agents also tell you that you’ll get a million (or more) at the end of the policy period. To a lot of us, the sound of A MILLION SHILLINGS is seductive to our ears which ultimately leads us to sign the policy document without reading the fine print and computing the benefits.

If you already have an education policy, don’t worry, our resident insurance expert, Maryann,  can help you compute the figures and advise if it’s a good choice or not. Book an appointment with her here. 

 

How do Education Insurance Policies work in Kenya?

 

An Education Fund is a long-term form of insurance that provides either a cash payout on the death or disablement of a parent/guardian while the child is still in school, or matures when a child is set to go to school, college or university.

Under the policy, the parent or legal guardian is the policyholder while the child is the life assured.

If the policyholder survives the term of the policy, the sum assured is paid to the policyholder.

Education Funds are designed as savings or investment plans and may have all or some of the following features:

 

1. Riders

 

Riders are additional benefits attached to the Education Insurance Policy, usually at an additional fee.

Examples of riders include:

  • Accidental death
  • Waiver of premiums
  • Last expense (payout to cover burial expenses)
  • Sum assured
  • Disability benefits
  • Student accident cover
  • Hospitalisation benefit
  • Family income benefit

 

2. Minimum Sum Assured 

 

This is the amount paid to your next of kin in the event of premature death.

 

3. Minimum Premium / Investment Amount

 

This is the minimum amount of monthly or annual contribution that you give to the insurance company over a specified period of time.

 

4. Cash Value

 

An Education Insurance Policy is a unit-linked fund.

Unit-linked means that: a portion of the premium you pay goes towards providing you with insurance such as in the case of early death, while the other portion is invested in a fund (unit trust) managed by the insurance company.

The principal and return are credited to the policy based on the performance of the fund.

The cash value of your policy, less any expenses incurred, is what you (policyholder) receive when the policy matures: if you survive the policy term (agreed time period) that is.

If you’re unable or unwilling to continue paying the premiums, you incur penalties.

The value of the investment is known as the cash value.

 

5. Surrender Value

 

As an Education Insurance Policyholder, you can access your cash value at any time: it is your contractual right. 

But, you will be penalized for withdrawing earlier than the agreed time period.

The portion of the cash value receivable if you cancel the policy before maturity is the surrender value.

The surrender value = Cash value –  the insurance fees – penalties

The surrender value is significantly less than the cash value: which is why many people who have been unable to pay premiums call insurance a fraud.

An Education Insurance Policy usually attains a surrender value after 2 to 3 years.

 

6. Paid-up Option

 

This is an option that allows you to keep the Education Insurance Policy running without paying any premiums for a while, or permanently.

But, because there’s no free lunch in finance, the Paid-up option is only available to policyholders who have already built up a significant amount of cash value in their policy as stipulated by the insurance company.

This option protects you from losing some of the benefits of the policy by either:

  • Having the remaining premiums deducted from the value of the policy which would result in a reduction of your sum assured.
  • Having the premiums considered to have been fully paid.

You should make sure that this benefit is captured in your policy because it’s a risk management method in case you’re unable to continue paying your premiums for whatever reason.

 

7. Tax Relief 

 

If you have an Education Insurance Plan, you’re entitled to tax relief of 15% of the premium subject up to a maximum of Ksh. 5,000 per month or Ksh. 60,000 per year.

 

8. Bonus

 

Bonuses are declared periodically (e.g. every year) to policyholders. Once the bonus is declared, it becomes guaranteed, in addition to the final benefits.

When declared, the bonus, which is a percentage of the sum assured becomes guaranteed.

This extra amount of money is paid together with the final benefits on the death of the life assured,  surrender or at maturity of the policy, whichever comes first.

 

9. Policy Loan

 

You can acquire a loan against the future benefits payable under an Education Insurance policy if your policy has acquired a cash value.

 

10. Grace Period

 

This is the period during which a policy remains inactive after the premium is due but not paid.

The grace period usually lasts for 31 days and you can cancel the policy if you haven’t paid any premiums.

The grace period is also used to review the policy document.

But if we’re being honest, unless you work with a good agent who can explain to you the terms of the document in simpler terms, most of us don’t read those documents because they’re complex and boring!

 

Are Education Insurance Plans worth it?

 

In a nutshell, NOPE! But if you still need convincing, let’s use a practical example.

One of my financial coaching clients shared the policy she got for her child. The details of the policy are:

Premiums/Contributions per month: KES 24,213. This adds up to a total annual contribution of KES 290,556.

Policy Term: 15 Years

Sum Assured: KES 3,000,000

 

The Benefits of the Policy Are As follows:

The truth about education insurance policies

 

This policy also includes 4 payouts before the maturity of KES 750,000 each totalling KES 3,000,000.

Using the above information, here’s a breakdown of the policy returns:

 

The truth about education insurance policies in Kenya

In total, she would have contributed KES 4,358, 340 in premiums.

6,000,000 – 4,358,340 (premiums) = KES 1,641,660 (interest she’d have gotten in 15 years)

When we add the KES 653,751.00 Tax Relief, the total benefit is KES 2,295,411.

What if she invested the same amount in a Money Market Fund?

Let’s run the numbers!!

 

The truth about education insurance policies in Kenya

 

If she invested the same 24,213 every month in a Money Market Fund for 15 years, she’d have gotten a total benefit of KES 3,765,279.72.

This is KES 1,469,868.72 MORE than she’d have gotten from The Education Fund! That’s almost double the amount!

I saved my client from losing KES 1,469,868.72! This is why I keep insisting that YES, YOU NEED FINANCIAL COACHING!

 

If you’re thinking…

 

But Agatha, MMFs don’t come with the insurance benefits she would have gotten from the Education Plan.

You should NEVER mix your investment goals with insurance. You need both investments and protection (insurance), but you shouldn’t combine the two.

The truth about education insurance policies in Kenya

 

If you want to protect yourself against natural/accidental death, critical illness and such risks, buy a pure Life Insurance product. Get a whole life or term life insurance policy. IT’S CHEAPER.

There’s also a high possibility that the payout from a life insurance cover will be much higher compared to an Education Insurance Plan.

You might also get lower premiums because insurance products with an investment component (like Education Plans) always charge a higher premium.

But, if you want to save and invest for your goals, including educating your child(ren), invest in a Money Market Fund, Treasury Bonds, Stock Market, Real Estate or other assets.

But because I’m not an insurance expert, let’s hear from Maryann.

Maryann, how should my client above use the KES 24,213 to both ensure they provide quality education for their child and also insure her life? Which education plan is best?

 

Which Education Plan is best? 

 

My thoughts have always been, why not take control of your child’s education plan yourself?

A good education plan ensures that if you are gone, school fees is covered. If you are alive when it is time for your kids to go to school (whether you are saving for high school or university, school fees is still covered.

The biggest secret to having an amazing education plan is always to have everything in its own box, that is, life insurance and savings/investment. This coupled with discipline, knowledge and confidence in self is a winning formula.

Why let the insurer do it for you when you can do it yourself under your own terms?

Check out what we did for Agatha’s client below.

The contribution is still Ksh 24,213:

 

The truth about education insurance policies in Kenya

 

Always remember, the pure life cover aspect of the education plan takes care of the fees in the case of your demise before the term is over and the savings aspect takes care of your child’s education in the case you survived the term.

So essentially, in an education policy, when the term is over and you survived the term, the pure life cover drops. The payout is therefore from the savings element of your policy.

Remember insurance only pays out in the case of an unfortunate situation happening within the term. It is first important to understand the difference between investment risk and insurance risk. Insurance is not an investment class.

For those who hate term life insurance because it does not “payout” when the term is over, just know you are already paying for one when you get the education policy because it is included in the premium.

Also for those who want to only pay one premium because it is convenient, do not let this ‘convenience’ result in the sacrifice of the very reason why the product is being purchased – good returns (for investment) and sufficient protection (for insurance).

By taking matters into your own hands, you have more control, there is transparency and as you can see from the case study below better benefits, in terms of returns and protection.

With the same Ksh 24,213, Agatha’s client was contributing towards the endowment policy, we were able to get her a bigger benefit in the case of her dying before the term is over and additionally, a bigger benefit when she survives the term.

A Win-win strategy, right? 

 

Find below a ‘before – after’ analysis:

 

The truth about education insurance policies in Kenya

What are other Disadvantages of Education Insurance Policies In Kenya?

 

1. You’re losing money…literally!

 

Education Insurance Plans masquerade as savings & investment products. They’re not!

They give low returns that barely cover inflation, which beats the logic of the agents telling you about education becoming more expensive by the day.

These companies invest in their own unit trusts (that you can access directly through investing in a Money Market Fund) and charge you a hefty management fee.

 

MMFs in Kenya

 

If you’re ready to open a Money Market Fund with either CIC Asset Management or with Sanlam (the two MMFs I recommend), please fill in your details in THIS FORM. I’ll contact you and help you set up your account in less than 24 hours!

P.S Even if you already have an MMF for a different financial goal, you can set up more. For example, CIC Money Market Fund allows one individual to set up 5 accounts.

 

2. The policies are hard to read and understand

 

The result? You sign up without fully understanding what you’re getting yourself into.

 

3. No flexibility

 

As I explained in the surrender value section  if you cancel the policy before maturity or miss a premium for whatever reason, there are hefty penalties

With the levels of job insecurity in this country, it’s better to get an option that offers flexibility.

The big question is: are you really securing your child’s future by choosing an option that loses you money in the long term?

 

Alternative Approaches to Financing your children’s education 

 

Opportunity cost is a basic finance principle. It is the idea that a “cost” is incurred when one particular option is chosen over other alternatives.

It’s the ‘opportunity forgone.’

When presented with two or more options, you should evaluate them in terms of opportunity cost.

Education Insurance Policies invest primarily in government securities and blue-chip stocks. You can invest directly in these assets as an alternative approach to financing your children’s education.

 

1. Money Market Funds

 

If you’ve stuck with me from the beginning, we’ve already proven that MMFs in Kenya are better than Education Plans.

 

MMFs come with a few advantages:

 

✅ The security of your investment is guaranteed.

 

It’s a low-risk investment.

 

✅ Transparency & Communication:

 

The daily prices are published in the daily newspapers the following day.  As an investor, you can always confirm the value of your investment by multiplying the number of units you own by the price in the newspaper.

Unlike with Education Insurance Policies, there’s no guesswork.

 

✅ Access to the Fund Fact Sheet

 

The MMF fund manager has a fact sheet that shows how it intends to invest your money and also gives you an indication of how risky the fund is.

 

✅ MMFs are a great way to store your money which prevents spending.

 

✅ MMFs offer an easy way to cultivate a savings culture.

 

✅ You only need a small amount of money to start!

 

Which is significantly lower than the Education Insurance premiums

 

✅ Ease of access to your funds

 

And there’s no penalty for access.

 

✅ MMFs are liquid

 

Liquidity refers to the ease with which an asset can be converted into cash without a considerable loss in value.

MMFs allow you to make regular withdrawals.

 

✅ MMFs such as Sanlam have a  Cash Withdrawal Facility

You can set it up so that cash is automatically sent to your children’s school bank account when school fees are due. ​

 

MMFs in Kenya

 

NB: If you’re ready to open a Money Market Fund with either CIC Asset Management or with Sanlam (the two MMFs I recommend), please fill in your details in THIS FORM. I’ll contact you and help you set up your account in less than 24 hours!

 

And the most relevant advantage?​

 

✅ You beat inflation

 

✅ MMFs don’t have a lock-in period or time frame

 

2. Treasury Bonds

 

A bond is a debt instrument.

The authorized issuer owes the bondholders (investors). The issuer is obliged to pay interest on the debt at the agreed rate and time.

Treasury bonds are long debt securities issued by the government (National & County).

In Kenya, Treasury bonds are issued by the government through The Central Bank of Kenya (CBK) and in the near future, Laikipia County could become the first County government to issue an Infrastructure bond.

By using Treasury Bonds, you can immunise yourself against a school fees obligation due in the future.

For example, school fees of Sh100,000 in three years can be immunised by purchasing a zero-coupon bond with a three-year maturity value of Sh100,000.

By purchasing the bond, your ability to pay the obligation in three years would not be affected regardless of how interest rates change.

For both MMFs & Bonds, 100% of your capital is used to fund the investment as opposed to a portion of the monthly premiums in a unit-linked education fund.

And unlike an education policy, there’s no risk of losing your investment in the event of a job loss or inability to continue making investment contributions for whatever reason.

 

Conclusion:

 

Getting an Education Insurance plan is literally giving somebody your hard-earned money, paying them a fee while also allowing them to tell you how to educate your children. In my book, that’s not a smart financial move.

The truth about education insurance policies in Kenya

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2 Comments

  1. RK

    My mind is blown, thanks!!!

    Reply
  2. Eve

    Fantastic write-up. Shouldn’t TAX be factored in though when making the comparisons e.g. MMF with a return of 9% gets taxed 15% meaning net return is 7.65%. Isn’t this the figure that should be factored in the compound interest calculator to show true gain/ avoid misleading conclusions. Is there tax component to the payout of an education policy?

    Reply

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