Should you consider tuition insurance?

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Imagine making a $25,000 investment, only to lose the entire sum less than a month later. Although such an investment scenario sounds like a risky proposition, that’s exactly what can happen to parents of college students if their child has to withdraw during the semester for medical or other reasons.

Most colleges and universities will only issue partial refunds after the semester has started. Few, if any, will return any money after the fourth week.

However, parents have the option to recoup their losses through tuition insurance issued by a third-party company. Such policies offer “peace of mind” to parents, says Joel Ohman, a certified financial planner and founder of

“Those hard-earned dollars that were scrimped and saved for years will be safeguarded, even if an unforeseen health catastrophe forces a student to withdraw,” Ohman says.

Under these policies, students who leave school because they break a leg, contract mononucleosis or are diagnosed with another medical problem can receive as much as 100 percent of paid tuition, room and board, and fees.

The coverage typically kicks in to cover any gaps between what was paid and what the college will refund.

If a student withdraws after the first week, for example, and the college returns 75 percent of the payment, the insurance would cover the remaining 25 percent. But some policies do not provide a 100 percent payback if a student leaves because of mental illness or psychological problems.

Types of coverage

A limited number of companies offer tuition insurance. Next Generation Insurance Group writes policies that can be applied to any college or university in the country, according to Bill Suneson, the company’s co-founder and president.

The company’s coverage starts at an annual payment of $239 for $5,000 in coverage for a semester, or $10,000 for the year, and ranges up to $599 for $25,000 for a semester or $50,000 for the year.

“Like any insurance product, it’s a matter of risk tolerance,” Suneson says. “I don’t think it hurts for students to have some level of refund insurance.”

The policy can be invoked for a 100 percent refund for tuition, books and fees should a student leave school due to physical or mental illness, an accident, or the death of a parent or payer.

The GradGuard coverage also includes other benefits, such as a registry to protect against identity theft; up to $50,000 in emergency medical evacuation insurance; up to $1,000 toward computer repairs and five years of extended warranty coverage on eligible products costing up to $5,000. “The (latter) are the risks students face when they go away to college,” Suneson says. “We did research to identify the common risks.”

Know the fine print

Because tuition insurance policies shield a financial risk, they are not typically subject to clauses barring coverage for preexisting conditions. At the same time, GradGuard wouldn’t cover an accident or new illness diagnosed immediately prior to the purchase of a policy, Suneson says.

“If they have a history of chronic asthma, and withdraw, they’re covered,” Suneson says. “If they start school and contract mono, and try to buy insurance, we’re not going to pay.”

Next Generation also has partnered with Sallie Mae to include up to $5,000 in tuition refund insurance with its Smart Option Student Loan program. By the end of 2011, the company will institute a separate insurance program for Sallie Mae customers, according to Suneson.

A rival insurer, A.W.G. Dewar, has offered tuition refund coverage since 1930, and claims to have originated this type of policy in the U.S. Dewar’s Tuition Refund Plan is not universal, but limited to a group of about 1,300 mostly private schools, including about 150 elite colleges and universities.

Coverage varies

Each school participating in the Dewar plan fields a customized policy, with costs ranging from 1 percent to 5 percent of its tuition and fees, according to Carmen Duarte, a corporate spokeswoman for Dewar, which is part of OneBeacon Insurance Group.

For example, the cost of Bard College, a small liberal arts college in New York’s Hudson Valley, for the 2011-12 year ranges from $43,600 for a returning off-campus student to $56,962 for a first-year student living on campus.

Bard’s tuition refund plan charges $467 a year for an on-campus student and $362 for a nonresident, according to information on the website. Coverage includes total reimbursement of the insured term tuition and fees for injury and sickness withdrawals and 60 percent for mental health withdrawals.

The policy coordinates with Bard’s refund schedule, which ranges from 80 percent back for a withdrawal in the first week down to no refund after the fourth week. “After the college’s refund policy expires, our benefits typically become the only source of refund available,” Duarte says.

Like any insurance, Dewar’s plans stipulate certain exceptions, including those for “war, riot, nuclear reaction, illegal drug use, and intentional self-inflicted injury or sickness,” according to Duarte.

Whether your child is attending a state school or an Ivy League institution, weigh the investment — and risks — before deciding if tuition insurance makes sense.

“Paying for college is the second biggest investment most families will make,” Suneson says. “People buy travel insurance, they buy wedding insurance — why not protect your investment?”