Due to the rising costs of college tuition, fewer families can pay to send their children off to college. But the youth of today are our leaders tomorrow, so it’s important that they receive their shot at a college degree without being hindered simply by money.
It’s our job as insurance and financial planning professionals to help our clients prepare more than adequate funds for their children’s college tuition.
Granted, this can be difficult for producers.
We can suggest how much our clients save, but we have no control over how much they actually set aside. We can propose putting money into stocks, but that comes with risk. Financial aid adds tens of thousands of dollars in debt down the road. Owners of 529 plans are penalized for using funds on anything besides education, so if there’s an emergency, those individuals will have to access funds elsewhere or pay (literally!) the consequences. Furthermore, if the policyholder of a 529 dies, the fund stops growing. Many families can benefit from the use of life insurance.
The account acts as a tax-deferred investment with an accessible, tax-free cash value for tuition (but not limited to only tuition). Life insurance has a handful of tremendous advantages.
1. Protection Against Death
Your clients are lucky enough to afford the ability to pay for their children’s tuition out of pocket. That’s great, but what happens if one or both suddenly die?
With a life insurance policy and the children named as the beneficiaries, if the parents suddenly pass away, the children will have access to the death benefit for debt, daily living expenses and college tuition.
Many other products stop growing without annual payment. If the parents who funded the program aren’t alive to pay, the children are out of luck. Life insurance is a self-completing product.
2. Higher Ceiling and Growth
Coverdell accounts allow for only $2,000 per year to be attributed. If your client started paying into a Coverdell fund at their child’s birth, they’d have $36,000 saved.
That should cover four years of a public university.
Life insurance allows policyholders to put in much more than $2,000 annually with a higher cap. There are no true limits to how much you can invest, though going over the cap on one product will transition the policy into another.
Furthermore, the premiums paid into life insurance grow on a tax-deferred basis. As your client pays into it, the funds continue to grow while untouched.
3. Tax-Free Withdrawals
If the policyholder should unfortunately pass on, the death benefit goes to his or her beneficiaries tax free.
Additionally, the cash value portion that accumulates is accessible for withdrawal while the policyholder is living. Best of all, the portions taken out for tuition (or anything really) also come tax free and without penalty.
4. Parental Control
Because the parent obtains the life insurance policy, they are in control of the policy, the payments and the output. They name the beneficiaries for the death benefit, and they are the only ones allowed to make withdrawals from the cash value.
Clients with children should feel comforted that they have the ability to pull out money when they need it and ensure that it goes toward exactly what they want it to.
This is especially beneficial for instances when the children of clients decide to drop out. Of course the payments already made for tuition can’t be recovered, but the policyholder need not continue making monthly tuition payments or dole out money for non-school related adventures.
5. No Affect on Financial Aid
Many other products can inhibit a client from obtaining additional financial aid as needed. Life insurance does not do this.
In fact, life insurance does not factor into financial aid calculations at all.
Financial aid can leave students and families with debt. But there are families who hesitate to withdrawal from the cash value of a life insurance policy. This benefit allows for both: the cash value is accessible to dip into without removing all of it, but a smaller amount of financial aid can still be obtained.
6. Use for Non-Educational Needs without Penalty
What happens if your client, who owns a 529 plan, uses the accumulated funds for anything besides education?
They’re penalized.
That means that if they have a large sum of money in the tens of thousands of dollars built up and they face an emergency, that money is inaccessible without suffering consequences.
Cash value in a life insurance policy can be used for anything without penalty.
Parents have control over an accessible pot of cash that can be withdrawn for tuition tax free, used for tuition or anything else without penalty, grows tax-deferred while left alone, and has no affect on financial aid if it’s needed.
And if anything happens to them, life insurance keeps funds in place for their children.
