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Monday, May 03, 2010

How Would You Feel About Such a Tuition Fee?

Following is a note to me from ProfK regarding a plan that is being discussed in a certain community to raise money for the schools. I have chose to edit out the name of the community until there is an official announcement so that we can concentrate on ideas rather than play into a rumor mill and discuss particular communities. I make an attempt here to discuss ideas rather than people, communities, or rumors.

Like ProfK, I find the idea of a school requiring parents to pay a fee so that a life insurance policy can be taken out for them by the school and with the school named as a beneficiary to be macabre. I have been an advocate of community education regarding the importance of life insurance. I believe parents of dependent children should be adequately insured and I don't think it is too much to ask families to insure themselves instead of expecting the community to pick up the pieces if the tragic happens, as it does. I would not be in opposition to some sort of requirement for parents of school children to carry life insurance as a condition of scholarship, although I'm not sure how this would work in practical terms. However, the idea of having a school, especially a school that is stressed financially, take out life insurance polic(ies) on their parent body almost feels like a death wish. That is just a gut feeling of mine, perhaps rational, perhaps irrational. I guess I'd rather not be viewed as more valuable dead than alive. May we all live and prosper until 120.



Orthonomics,

My husband came home from shul tonight with an interesting story. A friend of ours has two sons living in [unnamed community] and active in the community. Our friend reported that they are tossing around the idea in [unnamed community] of instituting a life insurance requirement at the local yeshiva. Every parent would be charged an extra $230 of tuition to pay for a one year term life insurance policy on the parents of students in the school. That's the parents, not the grandparents. Apparently from what our friend mentioned there are at least a few deaths each year among the parent body, whether father or mother. The feeling is that the payoff from the insurance policy would at least pay the tuition for those students where a parent had died plus some extra for the school.



To say this is macabre is too mild. Most of the men who heard this at shalosh seudos were astounded at what they saw as an idea in really poor taste. My husband also thought it was in poor taste but went one step further. The proceeds from the insurance policy would go directly to the yeshiva. Who is going to guarantee that they don't mismanage the funds [given the current state of financial management]? Why would parents trust a yeshiva with a closed books policy to manage the insurance payments and the money received?



No end to the out of sight solutions that some people are dreaming up instead of putting their efforts into something practical that might help.

ProfK

36 comments:

tesyaa said...

Weird - because at $230 per parent, obviously some are being way overcharged and some being way undercharged. Even among a parent body that is somewhat homogeneous, there are big ranges of age and health and smoking status. But the idea of carrying life insurance to pay tuition is nothing new; it's just that people who anticipate private school for many kids for 12-15 years should make sure they buy enough private term life. Currently, a widow with no means is usually put on the permanent scholarship list.

Anonymous said...

How much term insurance does $230 buy? Presumably the parents range in ages from 20's to 50's.

YoelB said...

This is somewhat reminiscent of a tontine. Wikipedia's article on tontines is instructive. The reference cited in the article, Using tontines to run the economy, is very interesting, particularly the description of the social pressures used to maintain accountability.

Honestly Frum said...

This is nothing more than the idea that was brought up by Charlie Kushner 2 meeks ago in JTA. It's an OK long term idea, but pretty breepy sounding. I do not want anyone having a life insurance policy out on me or a family member by anyone other than me. A old company I worked at wanted to do this as well, nedless to say I opted out.

Anonymous said...

To address your concern about mismanagement of the funds, the beneficiaries of the policies could be a trust that is only permitted to use the money for the tuition of children of the deceased parent, with the balance after the children have graduated available to pay for their higher education or, if any still left, to the surviving parent. This won't directly get money for the particular school, but could free up some scholarship money. The funds should be used for tuition at any school and not that particular school.

tesyaa said...

HF - as described in the post, it sounds different than Kushner's idea - it's true that both include life insurance, but this is term used to pay tuition in case of an actual death, while Kushner's is whole life used to build an endowment. Entirely different. Did you even read either idea thoroughly?

Dave said...

This is just silly.

If you have children (and really, even if you are married and don't), you should carry life insurance.

Have appropriate insurance payable to the suriving spouse or children, and let them pay tuition as they choose out of that.

Miami Al said...

Seems like a reasonable way to prevent tuition being used to cover death benefits for other parents. This way, the school prepays the death benefits, rather than leaving the widow/widower at the mercy of the scholarship committee.

However, the money should go "in trust" and be used to pay for the children of the deceased... After the last child of the deceased finishes school (which would be any child born of that marriage + 9 months, no law of perpetuity issue), the balance can go to the school as a "general scholarship."

If you want your own life insurance, take it out. This would be the school providing a parental death benefit. However, it should be no double dipping, if a parent dies and the children remain there, you shouldn't be able to subject them to the scholarship committee, that parent's children should be secure.

Might also help Widows and Widowers remarry without the burden of educating the children from the first marriage standing as an impediment.

Right now the schools "self insure" via the scholarship committee, much better to get them out of scholarship and into death benefit land.

Lion of Zion said...

i don't understand. $230 doesn't buy that much insurance even if you are in the best health. i'm sure there are plenty of people who couldn't get any insurance for $230.

AL:

"rather than leaving the widow/widower at the mercy of the scholarship committee."

so this is like a form of mortgage insurance?

"Might also help Widows and Widowers remarry without the burden of educating the children from the first marriage standing as an impediment."

interesting perspective. have you heard of this being an obstacle to widows/ers gettting married?

HF:

"It's an OK long term idea"

this is short term, as it banks on parents themselves dying as soon as the coming year. as tesyaa pointed out, kushner wants to build a long term endowment.

tesyaa said...

LOZ: a healthy 30 year old male nonsmoker can buy about $250,000 of 15 year term life for $230. A female can buy more. Ten years of level term coverage is cheaper; 20, 25, or 30 is more expensive.

Anonymous said...

So if a school with 500 students and 1000 parents has $230,000 going to buy life insurance that would pay $250,000 if one of those parents dies and gets nothing if there are no deaths that year. I would not gamble $230,000 at a small shot of earning 20K and a much larger chance of losing the 230K. Why not just put the $230 per parent in a separate segregated fund that can earn interest and only be used for scholarships for children with a dead parent?

Miami Al said...

Tesyaa,

And presumably, a one year term policy will be even lower, and a smoker distinction may not matter on a one year policy, assuming they are not currently suffering from a smoking related illness.

It sounds like they are primarily worried about accidental death, which a 1 year would mostly handle.

LoZ, I haven't heard of it, but I don't monitor the dating world. I imagine taking on someone else's children emotionally is a red flag, financially a double red flag.

Miami Al said...

Anon, because the self insured account will be raided. And in a bad year, 4 parents die in a fatal car accident, absorbing the families would perpetually burden the scholarship fund, while in this case, the children's education is provided for.

tesyaa said...

Al: One year term starts out cheaper but gets expensive quickly, because the insureds aren't re-underwritten every year. It's not a product that's readily available in the marketplace. There is so much competition in the level term market (think 10, 15, 20, and 30 year level term) that prices are very low.

tesyaa said...

I'd also like to comment on a sentence in the blog post: I guess I'd rather not be viewed as more valuable dead than alive.

In the Kushner scheme, the insured may very well be worth more dead than alive. In this scheme, though, the school is neutral as to whether the insured is dead or alive, UNLESS the parent dies and the survivor can no longer pay tuition and becomes a scholarship case. If you plan you affairs so if tuition will be paid regardless of whether there is an untimely death, you are worth no more dead than alive. I don't think this scheme is particularly macabre. Why is it different, in concept, than mortgage insurance?

Anonymous said...

Miami Al: Even in your 4 parent car accident scenerio, the fund will still do fine because there will be a new 230K coming in each year. Also, there are ways to set up the account so it can't be raided. Oce you get large enough groups, then self-insurance makes more sense than paying a profit and commissions to others.
The biggest detriment I see is that $460 per family per year and with some families paying multiples if it's a per student fee and there are multiple children or if they have kids in multiple schools (for sake of averages, lets say $1200/per family) is a lot when many of those families aren't able to pay full tuition to start with. Besides, the prudent family will still need to buy life insurance to pay for critical expenses in the event of death of a breadwinner parent/spouse, like rent/mortgage, food, etc.

Anonymous said...

tessya: I also don't find this macabre. Look at how many charities ask you to remeber them in your will or set up charitable remainder trusts or sell charitable annuities -- all of which makes the person more valuable dead than alive.

Anonymous said...

It would make more sense to require some minimum term policy for all parents. Potentially, costs may be driven down if the student body can pull together for group rates. Otherwise, per previous comments, those that have the means likely have insurance.

This sounds like a new "tax"/fee on those that can afford it.

The lowest income family will not be able to afford much/any. A question is whether the middle group would benefit and or be willing to do this.

Miami Al said...

Sounds like it's 230/family, and obviously it's really half that, because if you are on scholarship, either you are exempt from paying OR they increase your scholarship by 230 because $20/mo doesn't magically appear from this.

So in that 500 family example, assuming 60% on some sort of scholarship it looks like taking:

$46000 in new fees +
$69000 in rellocation of existing tuition dollars into this new policy.

That's $115000 for 1000 parents, or $115/parent to pay for insurance. Insurance underwriting profits are normally around 4%, so you're looking at recovering $110,400 annually, and "losing" $4600 for this insurance.

But you gain peace of mind that if any child loses a parent, they are safe in Yeshiva.

This may or may not be a good idea, but it's among the least bone-headed ideas I've heard of in the Yeshiva funding world. It takes a specific problem and insures for it, as opposed to crazy Ponzi scheme endowment plans or strange ideas that if you remove the pressure from parents to hold tuition dollars, our out of control spending will somehow come under control (the 5% solution).

tesyaa said...

We can require that students wear a uniform (which costs money); we can require that mothers wear a headcovering (which costs money, although it may be very little); we can require that kids participate in an expensive hot lunch plan; but we can't require something like term insurance to make sure that you don't turn into a scholarship case forever and ever?

Honestly, a uniform for one girl (3 skirts at $35 each, 5 shirts at $20 each, a sweatshirt, and kneesocks) is just about $230. Sometimes you can't even buy the uniforms more cheaply because the school requires you to use their vendors. And the vendors do not give scholarships.

Lion of Zion said...

"the school requires you to use their vendors"

i'm not opposed to uniforms in principle, but this is chutzpah

mlevin said...

My problem with it is how many years of school do you have left before you die in a tragic accident. There is a big difference if your child is in the first grade vs if your child is in 11th. Im assuming they are not forcing seniors to pay life insurance.

Anonymous said...

Honestly Frum,

Companies have been known to take out insurance policies on their employees without their knowledge, and to continue to maintain the policies after the employees leave the company. Obviously the money goes to the company, not the family of the employee/ former employee. This is known as "dead janitor" or "dead peasant" insurance.

Anonymous said...

Miami Al - Insurance underwriting profits are normally around 4%

I've heard that they are MUCH higher on term policies (mainly because people often drop them before the end of the term).

I suppose we also have to account for independently wealthy families (or extended families). Why should they "waste" $230 or whatever on term insurance when there is little doubt that even in the event of an untimely death, they will be able to pay full tuition. Perhaps 10% (or even as much as 25% in some communities) of the population might fall into this category.

Mark

JS said...

SL,

Do you have any posts (or can perhaps write a post) on what type of insurance (and how much) a frum family should have?

Anonymous said...

JS: I'm sure that SL will have a lot more to say, but the important thing to do is buy as much as you can starting young before any health problems crop up that could make coverage a lot more expensive. The usual rule of thumb is ten times your salary, but I would go higher, particularly if you haven't reached peak salary yet or have multiple children to put through school. In addition to lost salary a family that has lost a parent may have more expenses since they may have to hire someone to help with the things the deceased parent did - i.e. child care, house cleaning, yard work.
There are lots of websites with info on whole life v. term, level cost, guaranteed renewable, etc.

Esther819 said...

SL: If you write a more general post about why it is important to have life insurance, I will be happy to provide our "what happens if you don't" example.

Lion of Zion said...

JS:

SL posted a good guest post about life insurance a year or 2 ago. start there.

BrooklynWolf said...

There is, I believe, one additional point that hasn't been addressed.

So we require a parent to buy a policy with the school named as beneficiary. The reasoning behind this is that, it is assumed, the child could not pay tuition without the parent (otherwise, why the need for the program to begin with?).

However, if the school is named as the beneficiary, then you are trapping the kid in the school for the remainder of his/her academic life (and trapping the remaining parent in the same community).

While many kids remain with the same school all the way through, others sometimes need to change based on various factors. In addition (and perhaps I'm being a bit paranoid here) what happens if the kid becomes a bit difficult after the death of a parent (certainly that's not out of the realm of possibility) and the school decides s/he's too much trouble and decide to expel the kid. Now, they've gotten the benefit (the money) and are not even providing the service that the money is supposed to pay for.

I'm not opposed to the idea of requiring parents to have insurance, but I think that having the school named as the beneficiary should be rethought.

The Wolf

Miami Al said...

Wolf,

My understanding from the post was NOT that parents get insurance that pays the school. The idea was that there was a fee for it (basically, a tuition hike with a different line item), and the school would take out insurance on all the parents. This would be protecting the school from parents dying with unpaid bills.

In theory, the school's only economic interest is in the current year's tuition, but since children that lose a parent are normally given scholarship for the rest of their school life, the school does have a long term interest.

This "traps" the student in that they can get a free education there. The way to keep your children economically free if you die is to carry life insurance, as the status quo leaves the students somewhat trapped anyway.

Anonymous said...

Ridiculous. Schools need to cut costs.

Anonymous said...

Wolf: That's why I suggested the money go into a trust to pay the tuition regardless of where the child goes to school.

ProfK said...

Miami Al,
As reported to my husband, it WOULD be the school that is the beneficiary of the policy, not the remaining parent, and that is why I think the idea is so macabre. The school is basically betting that parents will die every year, providing money to the school. And if a child graduates a year after the death benefit pays out? Profit to the school. And if they leave the school for any reason? Profit to the school.

Miami Al said...

ProfK,

I'm just not seeing what you find so ghastly about this (I'll decrease your fifty cent word to one worth two bits).

The school suffers an economic harm when a parent dies. The school would like to hedge that risk by purchasing insurance. The school is choosing to spend it's cash doing so, and is increasing prices to do so.

I understand that some customers (parents) don't like this new, extra fee, and may choose to send their children elsewhere.

I'm just not seeing what is gross or immoral about a school taking out an insurance policy against a serious financial risk.

Yes, if parents die faster than the actuaries think, the school makes a profit. If parents die slower, the school loses money on the insurance, but doesn't have the loss of paying customers.

I realize that the side bet is gruesome, but all life insurance is equally gruesome, I'm better than I will die sooner than the actuaries think. But it's a hedge, I bet $1000 that I'll die earlier, and every other dollar on the idea that I'll live longer. I take a $1k hit to my standard of living so that if the bad event happens, my family doesn't suffer.

I don't see why the school should be responsible for providing a trust fund for the child "regardless of where they go to school," that was their parent's responsibility while they were alive.

The school is responsible for the electricity used there, not responsible for every child having electricity.

A Young Life Insurance Actuary said...

The insurance benefit here is not large and $230 should more than cover it. The benefit is the value of the future tuition payments for the child - if the child is a first grader then its roughly 11.5 times the tuition, an eleventh grader 1.5, etc.

I'm not sure how the law would apply to a private school self-funding this type of arranging. They might be clever enough to circumvent the law but I have no question in my mind that if they are subject to the law this plan is in direct violation.

Jen said...

OK, I know this post is a few days old now, but I just wanted to add a point no one else seems to be making (on a quick skim through the comments): even if the school has 1000 kids, "a few deaths each year among the parent body" which is presumably made up of adults 20-45, is huge. Even one a year would be a little shocking....What's wrong with this population that so many are dying so young?