Cedric Stephens, Contributor
Question: What is the best education and long-term savings product for a newborn child? Scotia Mint, Omni or products from LOJ (Sagicor Life Jamaica) and Guardian Life are among some that spring to mind. I want this mainly for college education and for starter funds when the child becomes older. I am looking for something with a low premium, say $1,000-$1,500, with a good return in 18-20 years.
- g_tavya@yahoo.com.
Answer: Guess what? Many, many years ago, I had an idea to develop an educational insurance/savings product. A market study was conducted. The initial feedback was positive. Demand appeared to be strong.
Discussions took place with the education and finance ministries. I encountered two roadblocks. My employers thought that the idea was rubbish. As a result, they tossed it into the trash can.
Entrepreneur
The second obstacle was, surprisingly, and in hindsight, me! Instead of chucking the job and developing the product as an entrepreneur, I remained an employee. Many years later, billionaire Michael Lee Chin - probably as a marketing gimmick - bought a product to fund the educational costs of his twin daughters. Today, my former employers are not the innovators they once were.
Insurance/savings plans to fund education is a big business. However, you have to put the cart before the horse. It is important to start saving now for the child's education.
Before doing so, however, you need to have an idea of what college education is likely to cost in 18-20 years' time.
Experts say a college degree is just like anything else.
You can pay a lot or you can pay very little. Also, you do not always get what you pay for.
The cost of college education in the US is very expensive. The College Board estimates, based on the 2007-08 academic year, that the total annual average costs (including tuition, books, travel, etc) for attending a private university - without grants - at US$35,374. Assume that those costs increase at seven per cent per annum. Also, that 17 years will elapse before the newborn enters university in that country. The projected costs would, therefore, amount to nearly US$500,000 in 2025 as follows:
Year 1: US $111,739.93 Year 2: US $119,561.72
Year 3: US $127,931.05 Year 4: US $136,886.22
Total: US $496,118.92
The local costs of tertiary education are not cheap.
The 2008-09 cost of tuition for full-time students at the University of the West Indies (UWI) ranges from a low of $167,925 to a high of $535,774 for persons enrolled in the faculty of medical sciences. (see www.mona.uwi.edu/admissions/fees.)
Although information is available about the costs of living on campus, $140,000 at today's prices, none could be obtained about the cost of books or the projected rate of inflation in these costs.
It is, therefore, impossible to project what the total costs are likely to be in 2025.
That product has two parts. One part is insurance and the other is savings. Buyers decide how much is paid for insurance and how much goes into savings.
Monthly premium
The minimum monthly premium of $1,800 for a two-year old male child is projected to accumulate approximately $530,000 and $660,000, respectively over 15 years. Those amounts assume an annual average rate of return of 10 and 12.5 per cent, respectively. Those funds would probably be enough to pay for only one year's tuition at the UWI and one quarter of one semester at a US college, at today's prices.
In part two of this article next week, I will look at the product that marketing guru Lee Chin bought and others offered by Heritage International Scholarship Trust.
Cedric E. Stephens provides free, independent information and advice about risk and insurance. Email: aegis@cwjamaica.com
