Tuition Insurance: Worth It Or Waste Of Money?

By Ronald Kimmons. May 7th 2016

In the United States, a year of university studies can easily cost tens of thousands of dollars. For parents who are paying for the bulk of their students’ educational costs, this can amount to a hefty sum. The financial burden becomes particularly acute if the student proves unable to finish his or her studies during a particular school year. In such a case, parents may end up with a large amount of debt and nothing to show for it. To protect against such situations, some educational institutions and insurance companies offer tuition insurance – also called tuition refund insurance. This insurance reimburses some or all of the student’s tuition if he or she is unable to finish the term for a reason that is covered in the policy. In some cases, purchasing such coverage can be a wise financial move. However, it is not for everyone. Read on to find out if you should consider purchasing a tuition insurance policy.

Types Of Coverage

Different companies and policies offer different types of tuition insurance coverage. The most common area of coverage is death or withdrawal for health-related reasons. Because of this, the situation in which it makes the most sense for a student or parent to purchase tuition insurance is when he or she has some sort of illness that could become serious during the term of study resulting in an inability to finish. Since most university-age students are quite healthy, though, such coverage does not make financial sense for most students. Some policies also provide coverage for instances in which the student cannot finish the term due to disciplinary action. However, since the risk of being unable to finish due to disciplinary action is usually something completely under the control of the student, parents should not worry about this type of coverage unless their children have exhibited a tendency toward doing things that could result in such action.

Coverage Amount

Some universities in the United States cost more than others. Students studying at public universities in their home states tend to pay relatively low tuition while students studying at top-ranked private universities tend to pay relatively high tuition. When the total amount of money being risked is higher, it makes more sense to insure that sum. Some policies cover the entire amount of tuition while some require a copay of between 10 and 40 percent.

Mental Vs. Physical Coverage

While tuition insurance typically covers students who withdraw for reasons related to both mental and physical health, the coverage for both circumstances tends to be different. For instance, a policy that covers 100 percent of tuition in the case of withdrawal for reasons related to physical ailments may only cover 60 or 75 percent of tuition for withdrawals resulting from mental disorders. It may also make strict stipulations about such mental disorders. For instance, it may require that the claimant must have spent a certain amount of time in the hospital as a result of the disorder.

Cost

The cost of tuition insurance coverage varies according to the company, coverage amount, type of coverage and background of the individual who is covered. It usually ranges between 1 and 5 percent of the total amount of tuition covered.

Existing Refund Policies

In some cases, a tuition insurance policy may be unnecessary because the university already offers a satisfactory refund policy. Some universities will reimburse tuition in full if the student passes away during the term. This might also apply to withdrawal due to medical reasons. Other universities offer tuition refunds on a sliding scale depending on how far the student got into the semester. Before signing up for a tuition insurance policy, research your university’s existing refund policy to make sure that you are not wasting your money.

Claim Rates

According to an article by the Wall Street Journal, universities report that the amount of students who make claims on tuition insurance policies versus the total number enrolled in such policies is only about 1 or 2 percent. For this reason, it is clear that the actual risk that students face of needing such insurance may actually be rather low.

University Involvement

In some cases, universities openly encourage students and those supporting them to purchase tuition insurance. They may qualify these suggestions by saying that the insurance is being provided by a third party and that they do not get a cut of the premiums collected. However, even though they do not usually profit from the premiums, universities do usually benefit directly when students who withdraw have such insurance. This is because, if the student owes money or has a scholarship, the university collects that value directly from the insurance company before anything goes to the beneficiary of the claim. For this reason, universities may sometimes exaggerate the need of such insurance because it is a no-cost way of protecting their own interests.

Alternatives

When it comes to the risk of death, a more viable alternative to tuition insurance may be life insurance. Life insurance policies can often provide a higher level of coverage with fewer constraints. As for concerns of withdrawal due to medical reasons, most financial advisors feel that tuition insurance is not a worthwhile investment unless you feel that there is a high possibility of this happening. Otherwise, it may be better to simply save your money.

It is important to do all of your homework before purchasing a tuition insurance policy. Make sure that you carefully weigh the pros and cons before making a final decision.

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