Education insurance for children: setting the financial course for the future
02.04.25
10
Minutes
Katrin Straub
Managing Director at nextsure
Children’s education is one of the biggest financial challenges for families. An education insurance policy for children promises to help you make early provisions. But what does it really offer, and which aspects are crucial for sensible cover?
The topic in brief and concise terms
An education insurance combines saving for the child's education with death benefit protection for the premium payer.
The returns on traditional policies are often low; alternatives such as ETF savings plans may be more advantageous.
Before committing, costs, flexibility and the actual requirements should be carefully reviewed and offers compared.
Understanding children’s education insurance: The basics
An education insurance policy is, at its core, an endowment life insurance policy designed specifically to finance a child's education. It combines long-term saving with insurance cover. It is usually taken out by parents or grandparents, with the child as the beneficiary.
The idea behind it is simple: over many years, often from the child's birth, regular contributions are paid in. At the agreed time, typically on the 18th or 25th birthday, the saved sum including any possible bonuses is paid out. This capital can then be used for tuition fees, the first flat of one's own, or other education-related costs. An important feature is often the integrated death benefit for the policyholder. If the insured parent dies, the insurance takes over the further premium payments, so the savings goal is still achieved. For comprehensive family protection, this is an important aspect.
This form of provision aims to create financial security for an important stage in the child's life. Policy terms often range from 15 to 25 years. This means that even with smaller monthly amounts, starting at around €25, a considerable sum can build up over the years. Early planning makes it possible to make optimal use of compound interest. This makes education insurance one building block of education provision for children.
How it works in detail: contributions, term and safeguards
Contributions for an education insurance policy for children can be paid monthly, annually or as a single payment. Many providers already allow contributions from as little as €25 or €50 per month. The term is usually chosen so that the payout takes place when training or university starts, often at the age of 18 or 19. Longer terms up to the age of 25 are also common, for example to cover a Master’s degree.
A key component of many policies is the death benefit cover already mentioned. If the person paying the premiums (usually a parent) dies, the insurer steps in and continues the policy with premiums waived. This ensures that the child receives the agreed sum at the end of the term. Some tariffs even offer cover in the event of the premium payer becoming unable to work due to occupational disability. The payout is made either as a lump sum or in the form of a monthly annuity. The accumulated capital is not tied to any specific purpose; the child can use it freely. Considerations regarding children's protection in the event of death play a major role here.
Additional modules can extend cover; here are some examples:
Accident supplementary insurance for the child.
Option to take out later occupational disability insurance without another medical examination.
Long-term care provision components.
This flexibility allows the cover to be tailored to individual needs and financial circumstances. However, it is important to check the exact terms and costs of these additional benefits.
Evaluate costs and potential returns realistically
The costs of an education insurance policy for children are made up of various components. These include acquisition and distribution costs, administration costs and the cost of risk protection (e.g. death cover). These costs reduce the return. The guaranteed interest rate on traditional policies has fallen significantly in recent years due to the low interest-rate environment, often to below one per cent.
An example calculation makes this clear: with a monthly savings rate of 100 euros over 20 years, a total of 24,000 euros is paid in. A traditional education insurance policy could, after costs and before tax, pay out, for example, 29,000 to 32,000 euros, depending on the bonuses. Unit-linked policies offer potentially higher returns, but also involve market risk. The actual return depends heavily on the chosen product and the development of the capital markets. It is therefore advisable to compare different savings options for children.
Insurance experts and consumer advocates point out that returns after deducting all costs are often not attractive. The lack of transparency in the cost structures is often criticised. Before deciding on an education insurance policy, you should therefore always obtain several quotes and check the actual costs carefully. A term life insurance policy can often be taken out separately at a lower cost to provide death cover, while saving takes place through other investment products.
Review sensible alternatives to traditional education savings plans
Given the often high costs and low returns of traditional education insurance policies, many parents are looking for alternatives. One popular option is ETF savings plans. These invest in exchange-traded index funds and usually offer better long-term return prospects, with lower ongoing costs often below 0.5 per cent per year. Over a period of 18 years or more, attractive sums can be built up here, although they are subject to market fluctuations.
Other alternatives include:
Bank savings plans: Safe, but currently usually low interest-bearing. Suitable for risk-averse savers.
Fixed-term deposits or instant-access savings accounts: Flexible and secure, but the interest often barely covers inflation. There are currently offers of over three per cent again.
Building society savings contracts: Can be useful if property financing is planned later, but as a pure investment they often offer low returns.
Children's investment accounts: Allow direct saving in shares or funds in the child's name.
The choice of the right alternative depends on individual risk tolerance and financial goals. Many experts recommend separating risk protection and capital investment. A separate term life insurance policy for the parents and a flexible savings plan with higher returns for the child can often be the better solution. Disability insurance for children can also set important foundations at an early stage. The decision in favour of the right education savings plan should be made carefully.
Expert knowledge: legal frameworks and tax implications
Parents are legally obliged to finance their children’s education appropriately, provided they are financially able to do so (§ 1601 BGB). This maintenance entitlement generally applies to the first vocational qualification. An education insurance policy can help fulfil this obligation. The capital accumulated usually belongs to the child once it has been appointed irrevocably as the beneficiary or the policy is taken out in its name.
For tax purposes, contributions to education insurance policies taken out before 2005 may, under certain circumstances, be recognised as special expenses (retirement provision expenses). For more recent policies, this is usually no longer the case. Returns from the payout may be subject to income tax, particularly if the term was less than twelve years or if the payout takes place before the policyholder reaches the age of 60 or 62, and the policy was taken out after 2004. Our expert tip: Always clarify tax questions with a tax adviser, as individual circumstances are decisive. The child’s health insurance is a separate but equally important aspect of provision.
Contract terms should be checked carefully. Pay attention to notice periods and possible losses in the event of early cancellation. Flexibility around payment breaks or additional payments can also be an important factor. Liability insurance for children is also a must for every family.
Making the right decisions: Important tips before signing a contract
Before taking out an education insurance policy for your child, a thorough review is essential. Compare at least three to five different offers. Pay attention not only to the projected final sum, but above all to the guaranteed benefits and the stated effective costs. These show how much of your contributions is actually used for savings and how much for costs.
You should pay particular attention to the following points:
Flexibility: Check whether additional contributions or contribution pauses are possible and under what conditions.
Risk cover: Is the death benefit sufficient? Are there options if the policyholder becomes unable to work?
Return opportunities: How high is the guaranteed interest rate? What opportunities and risks exist with unit-linked variants?
Transparency: Are all costs clearly and comprehensibly itemised?
Our expert tip: Consider whether separating savings and risk protection would be more advantageous for your situation. A combination of an inexpensive term life insurance policy and a flexible ETF savings plan can often offer higher returns with greater transparency. Also think about supplementary cover such as dental supplementary insurance for children. Get comprehensive advice to find the best solution for your child's future.
Request an individual risk analysis now: Have your insurance situation reviewed free of charge and receive concrete suggestions for optimisation.
More useful links
German Institute for Economic Research (DIW) provides comprehensive information and analyses on the topics of education and the labour market.
FAQ
When should you take out an education insurance policy?
Ideally, an education insurance policy is taken out as early as possible, preferably shortly after the child’s birth. This allows for a long savings period and makes optimal use of the compound interest effect.
Who is the beneficiary in an education insurance policy?
The beneficiary is usually the child for whose education savings are being made. The parents or grandparents are usually the policyholders and contributors.
What happens if the contributor dies?
Most education insurance policies include life cover. If the contributor (e.g. a parent) dies, the insurer takes over the remaining premium payments, so that the savings goal for the child is reached.
Is the money from the education insurance earmarked for a specific purpose?
No, the capital paid out is generally not earmarked for a specific purpose. The child can freely dispose of the sum, even if it was originally intended for education.
Can you cancel an education insurance policy?
Yes, cancellation is usually possible, but it is often associated with financial disadvantages, as the surrender value can be low, especially in the first few years. Cancellation should therefore be carefully considered.
Are contributions to education insurance tax-deductible?
For contracts concluded before 2005, contributions may under certain circumstances be claimed as special expenses. For more recent contracts, this is usually no longer the case. Income may be taxable. Clarification with your tax adviser is recommended.
