Why Life Insurance Can Provide the Ideal College Planning Tool

In today’s world, as the competition for jobs has become much more fierce, a college degree is imperative to have in order to even just get in the door at some companies. Yet, although this requirement may be essential, it can also be extremely costly.

With the price of both in-state and out-of-state college tuition being in the high 4-figures to high 5-figures per year (or in some cases, even more), the cost of obtaining a college degree can be extremely steep. And, on average, these costs tend to rise between roughly 5 and 8 percent every year. So, if a child is fairly young, by the time they are ready to enter into the world of higher education, the price tag could rival that of a sizeable home mortgage.

Given that, many parents, grandparents, and / or other loved ones will oftentimes start saving for a child’s college education early in the child’s life. Certainly, one of the key advantages of doing so is to allow the effect of compound interest to grow the dollars that are being saved. So, for instance, over a time period of 12 to 15 years, the snowball effect could allow these funds to grow exponentially.

There are many who will simply use regular bank or investment accounts in order to save for a child’s education. Unfortunately, the money that is withdrawn from these types of vehicles will be considered taxable income – which in turn, will lessen the amount of money that is ultimately available to pay the child’s college costs.

Others will take it a step further and open a 529 college savings plan. The money that is in these accounts is allowed to grow on a tax-deferred basis. However, when the funds are withdrawn, it must be used for education-related expenses. If not, penalties could result.

There is a better way, though, that can allow both the tax-deferred compounding of funds, along with the control and flexibility to use for the funds for college costs, or for any other need that may come up. This is through the use of a permanent life insurance policy.

 

Structuring Life Insurance to Reach College Savings Goals

Typically, a permanent type of life insurance such as whole life can be used in college funding situations. In this case, there are a couple of different ways that the insurance plan may be structured. These include placing the policy on the child, or on the life of a parent or guardian. Depending on how the plan is set up, there can be a number of benefits, such as:

  • Growth due to tax deferred cash value build up. By putting life insurance coverage on the life of the child, the funds that are in the cash value account can offer tax sheltering and flexibility in terms of the use of the money. When a child is born, parents may take out a life insurance policy on the child – provided that he or she is healthy. Even a very large policy may be purchased for a relatively small premium amount. In most cases, the child can be put on the policy as the insured, with the parents being listed as the owners, as well as the beneficiaries. As premium payments are made into the policy, the growth that is generated by the cash value component will not be subject to current income taxes. Therefore, the cash value can grow exponentially. When the time comes for the child to attend college, the parents may cancel the life insurance policy and withdraw the cash or they may keep the policy and borrow the cash at a low interest rate in order to pay the child’s college expenses. By going with the latter route, the funds can essentially be accessed from the policy tax-free.
  • Secure savings in the event of a parent’s death. A life insurance policy may also be placed on the life of one or both parents (or grandparents), with the child being named as the beneficiary. If this is the case, should the parent (or grandparent) pass away, the child’s college education may still be assured of funding, as the proceeds of the life insurance policy may be used for this purpose. If the parent or other insured is still alive, the cash value from the policy can still be accessed.

 

Taking the Next Step

Showing your clients how they can use tax-advantaged strategies to save for future college costs – and to ensure that regardless of what occurs, money will be available to the child down the road – can provide them with added financial security.

To learn how thousands of other insurance professionals are currently using these strategies to earn a nice living each year, while at the same time providing their clients with the college funding plans that work for them, contact us at 1-800-643-6143
anytime Monday – Friday from 9:00 am – 4:30 pm.

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Brian J. Kay, Executive Director, Leads4Insurance
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