Every parent desires to secure their child’s financial future. With university education in Kenya costing an average of Sh130,000 to Sh500,000 a year, proper financial planning ensures that your children will have funds set aside for college and well-catered for in case of an unforeseen catastrophe.
Here are some steps you can take to protect your child’s financial future:
Get life insurance
One of the best ways to ensure that your child will be provided for, even in the event of your death, is by taking out life insurance. In two-parent homes, both parents can take life insurance.
Alternatively, the parent who plays the role of the main provider can get life insurance to ensure that their spouse and children have some provision in the case of death.
Life insurance will help cover the immediate and long-term expenses, including children’s education. In a one-parent home, getting life insurance is even more crucial. In case of death of the sole parent, children won’t have another parent to provide for their needs.
Consider going for term life insurance – which covers you for a certain period. For instance, you can take a term life insurance that covers 10, 20, or 30 years. If you die within the term period, the policy pays out to your beneficiaries. If you outlive the policy, you don’t get any payment.
You can also opt for an endowment policy. In case you die within the policy period, your beneficiaries can claim benefits. If you outlive the policy, you still get paid. Some endowment policies even pay out the accumulated benefits at certain intervals during the policy’s term period. At the end of the policy term, the remaining accumulated benefits are paid as a lump sum together with accrued bonuses.
Most life insurance or endowment policies come with an accident and disability cover, which means you are able to claim full benefits if you’re disabled.
Get education insurance policy
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Simply put, an education insurance policy pays for your child’s education in the future. Education policies are designed as a savings tool that pays a lump sum to cover your children’s education.
Unlike other saving plans, education policy has a life insurance benefit. This means that in the event the parent (policy owner) dies, the child will still have access to the full benefits of the fund to help finance their education.
You should set your child’s education policy as early as possible. Starting from the time your child is a newborn allows you to take your time.
By the time your child is ready for college, you won’t have the financial strain that is often associated with college fees. Instead, you can focus on other financial goals such as investing and saving for your retirement.
Most financial experts are in favour of using life insurance and other stable investments instead of an education insurance policy.
You might also opt to use a regular savings account for your child’s education. This is because the education policies charge extra fees and the returns are usually quite low.
Education plans in Kenya are also not as flexible as many would like. If you’re unable to pay the premiums before the maturity period, you might lose your savings.
Open a custodial savings account
On top of an education savings account, it is a good idea to open custodial savings account for your child. You can put a little bit of money into the account for your child until they’re able to earn an allowance.
You can use this account to teach your child the importance of saving and investing, skills that will serve them for a lifetime.
When you give your child an allowance, you can teach them how to put away a portion of it into their account for future use.
Talk to the child about the interest the account earns and how it will generate more interest as the amount increases. The plan should be to give the child full control of their account at the age of 18. By then, you will have confidence in their ability to wisely manage their own money.
Draft an updated will
Creating and updating your will when necessary is an important part of safeguarding your child’s future. In the event of your untimely death or incapacitation, you want to ensure that your assets go to your children, not greedy relatives.
After creating your will, name a trustworthy guardian to act on behalf of your child. You need to appoint both a caretaker – someone who will take your child into their home and raise them in your absence, and a financial guardian. One person can serve both of these roles, ideally. But you can also opt to appoint different people for those roles.
To avoid conflicts, have a discussion with the person you’re appointing as a caretaker or financial guardian. Communicate your intentions and expectations regarding how you would like your child’s finances to be handled in your absence.
Update beneficiary information
On top of your will, make sure that the beneficiary information on all relevant accounts is updated to reflect your wishes. The information on the beneficiary designation form usually overrides the information contained in a will.
Therefore, update all your accounts’ beneficiary information after important events such as birth, marriage, death of a spouse, or divorce. You might also want to name a contingent beneficiary in case the primary beneficiary predeceases you.
Save for retirement
Do you plan to depend on your children in old age? Then you’re putting both yours and their financial future in jeopardy. As you age, you’re likely to have more health issues that require medical attention.
If you rely on your adult child to provide for you and pay your medical bills, you will be putting a lot of financial strain on your child.
To ensure that you’re not financially dependent on your children in old age, start saving and investment as early as possible. Ideally, you should save at least 15 per cent of your gross income for retirement each month.
The earlier you start, the more time you will have to build your retirement nest egg.