SAVING for your children's education is no easy task and it is made all the more difficult when you are advised to buy a totally inappropriate savings policy.
In 1994 the H family returned to Ireland after spending a number of years living in Africa. Mr H is an engineer, and he and his wife have four young children, then aged 13, 11, 9 and 7 years.
One evening while they were living in a small town in Cork, a life and pensions broker knocked on their door and inquired whether he could sell them some insurance. Mr H was not at home at the time and Mrs H invited him to return at another date since the couple had only recently been discussing the need for Mrs H to have her life insured. They were also keen to save for their children's third-level education.
The broker duly returned and Mr and Mrs H, who had £100 a month to spare, were sold an Eagle Star Living Insurance Heads tart Education Plan, a whole of life contract, designated, in this instance, as a school fees savings policy. Included as part of the plan was £50,000 worth of life cover for Mrs H. Premiums would be indexed at 5 per cent per year, ostensibly to keep up with inflation.
The couple understood that their £100 a month contributions would not be sufficient to meet the total cost of putting the four children through college, an amount which the broker, using Eagle Star software projections, estimated to be £38,436 over the period 1999-2008. But at a steady annual growth rate of 7 per cent, the software projected that this policy would meet half the total cost, or £19,204.
According to the quotation provided bye Eagle Star, in 1999, just five years after commencing the policy, the H's could start drawing down the £6,213 designated for their eldest child's four years at college (i.e. £1,553 per year). Two years later, in 2001 they could start drawing down the £3,719 designated for child number two (£929 per year); in 2003 they could start drawing down the £3,018 earmarked for child number three's college costs (£754 per year), and in 2004, they could begin drawing down the £6,254 (£1,563 per year) designated to help meet their youngest child's costs.
It should be noted however, that by 1999 the couple would have paid just over £5,600 into their policy. By the company's own estimate, after the initial set up charges were taken into account the fund would only be worth £5,232, assuming that it achieved its annual growth rate of 7 per cent.
Mr and Mrs H had misgivings about their Headstart policy soon after they purchased it and in a letter to Eagle Star's customer services department in June 1995, Mrs H wondered why the policy documents did not refer to "the children's education fund and that we could draw on it after a certain period of time." She also states that "we thought the policy was over a 10 year period, yet it states 20 in the policy. Is it for a 20 year period, or is this just the life cover? If it includes the children's education period, our youngest child will be 27 years old in 20 years time and will surely not need help with education." And finally, Mrs H wanted to know, "if the education plan is covered, could you please let us know what is the benefit when our children finish in secondary school in 1999, 2001, 2003, 2004".
The H's clearly did not understand how the policy worked. They were not aware that the first two year's premiums would be absorbed by the company to meet the setting up costs of the policy, including the broker's commission, and that, in the words of the customer services manager who replied to Mrs H's letter, "the policy ... would only acquire a value after two years." Nor did they realise that a large chunk of the 5 per cent annual indexing of their premiums would also be taken up in costs and renewal commission.
Eagle Star eventually provided the couple with "illustrative encashment values" which showed that their fund would be worth £5,232 after five years and £15,725 after 15 years, assuming of course that the 7 per cent projected growth level was achieved by their investment fund. What the company did not point out, then or at the time the policy was sold, was that such encashment values were only realistic if no monies were drawn down.
Family Money consulted an actuary about the value of the H family's policy. The policy is a whole of life instalment, when funds are withdrawn at an early stage from such policies, that is within the first 10 years, the returns will be relatively small - as little as 2 per cent per annum. The level of annual encashments Mr and Mrs H planned to make to meet their children's college expenses are "far too high for their policy to sustain when all costs and charges, and the short period of time in which the investment fund had to operate, is taken into account," we were told. "An equity based investment needs about 10 years to build up a substantial enough fund for regular withdrawals to be made."
In effect, the H's would simply be withdrawing their own capital from 1999 - capital that would run out long before the year 2008.
When we contacted Eagle Star, they hastened to point out that this policy was sold by an independent broker and not directly by the company. A spokesman said that education policies like these are designed for long term savings and should not be encashed in the early years. He admitted that the software programme supplied by Eagle Star to brokers does not have any sort of feature which prevents encashment illustrations being given in the first 10 years. All it shows, he says, "is that there is no value in the fund before the second year".
Mr H is relieved that only two years of premiums - about £2,400 - were paid into this policy and that he did not let his concerns go unanswered for any longer. He intends to formally complain to Eagle Star, "to seek the return of my premiums" and to the Irish Broker's Association. "I believe we were misinformed about the amount of money we would be able to take out of this policy, even if it did earn 7 per cent per year.
