Using Life Insurance to Save for College?

The Policy Used Can Make a Difference

With the cost of a college education raising rapidly, parents and other loved ones who want to help out with a child’s future college expenses are seeking options. One of those possibilities is using life insurance.

But, while this financial vehicle can provide numerous college savings-related advantages, not all life insurance plans are created equal. So, it is important to ensure that clients who opt to use life insurance for college education costs are going with the proper option for their needs.

Term Versus Permanent Life Insurance for College Planning

As life insurance professionals are well aware, there are a myriad of policy “flavors” that are available in the market – and today, these go far beyond just simple term and permanent coverage.

As an example, most life insurance policies offer additional “bells and whistles” such as living benefits (i.e., the option to pull funds from the death benefit to use for terminal illness, chronic illness, and / or long-term care expenses), as well as waiver of premium riders, and other customizable features.

But do these really make a difference when using life insurance to help pay for a child or grandchild’s college?

Not necessarily.

For instance, while term life insurance can oftentimes be a much more affordable alternative – especially for those who are in relatively good health when applying for coverage – because term life does not offer any type of cash value or investment build up, the only way to “win” is for the insured to die before the child needs the proceeds.

On the other hand, because permanent life insurance includes both death benefit protection and cash value, these policies offer flexibility for withdrawing or borrowing the funds, along with a safety net in case of the insured’s passing.

Like many other types of college savings vehicles, the cash value in a permanent life insurance plan is allowed to grow tax-deferred, meaning that there is no tax due on the gain until the time of withdrawal. This tax-advantaged nature can essentially allow the money to grow and compound exponentially over time. But that’s just one of the many benefits that can be garnered.

 

The Added Advantages of Saving for College Using Permanent Life Insurance

Permanent life insurance can also offer additional advantages, too, over options like a 529 college savings plan. For example, should the child not end up attending college in the future, the cash value from a policy can be used for any purpose (unlike a 529 plan where the money must be spent on education-related expenses, or it is otherwise penalized).

Plus, if the amount of money that is withdrawn from a permanent life insurance policy is less than the premiums paid in, then these funds can be received tax-free (in turn, basically netting the recipient more money to use for their various needs).

An additional benefit of using life insurance for college savings needs is that, unlike the 529 plan, there is no limit on how much can be contributed to the insurance policy each year. This can not only allow for an additional “base” for tax-deferred growth, but it can also open up another avenue for those who have “maxed out” other tax-advantaged financial vehicles like their IRAs and 401(k)s to contribute even more money that grows without annual taxation on the growth.

 

Providing More Options for Your Clients Can Pay Off

Want to know how thousands of other insurance professionals are using these strategies with their clients to generate life-changing amounts of commissions, while also helping customers to achieve their financial goals?

Give us a call, toll-free, at 1-800-643-6143 for more information on how to get started now.

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Brian J. Kay, Executive Director, Leads4Insurance
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