3 Benefits to Using Life Insurance as a College Savings Vehicle
As a parent, you only want the best for your child. You want them to be happy and to have fun. You’d like for them to have strong friendships and a full social life. And you likely want them to get a great education so they can have a successful, fulfilling career.
Unfortunately, the high cost of college has made it difficult for many parents to afford the kind of education they desire. According to a recent study, the average annual costs for “moderate budget” public and private schools in the United States are currently $24,061 and $47,831, respectively.1
Those prices will likely rise in the future. Experts estimate the cost of tuition, room and board, fees, and books to increase by an average of 5 percent annually well into the future. At that rate of inflation, the average annual cost of college is expected to be $40,935 in 2030. The average private school is expected to cost $90,576 annually.2
The good news is you’re not on your own to cover these costs. Your child may qualify for some form of financial aid, such as scholarships, loans, work-study programs, and grants. However, the amount of aid he or she receives often depends on your own financial stability. The more income and assets you have, the lower the aid package is likely to be.
Given that financial aid will likely only cover a portion of the costs, it makes sense to consider various savings vehicles. The 529 plan is one of the most popular options because of its tax advantages. However, 529 plans can only be used for education, which could be problematic if your child chooses a different route.
One option that may not be obvious is life insurance. While life insurance is usually a tool to protect families against the financial fallout from a loved one’s death, it can be used for other purposes. Below are three reasons why it might make sense for your college savings plan:
Growth Potential With Downside Protection
Most forms of permanent insurance consist of two components: the death benefit and the cash value. The cash value usually has a mechanism in which it can increase on an annual basis. In whole life insurance, the cash value is credited with dividends. In universal life policies, the cash value is grown through interest, and in variable universal life, investment subaccounts provide the growth opportunity. There are even indexed universal life policies in which you can receive interest based on market performance.
In most of those policies, you aren’t exposed to downside market risk. Your cash value could decline in variable policies. However, in whole life, universal life, or even indexed universal life policies, there is no risk of investment loss.
Cash value grows inside a life insurance policy on a tax-deferred basis. There are also ways to take distributions from the policy in a tax-free manner. One way is to simply withdraw your policy basis, which is the money that you contributed to the cash value. You can always withdraw basis without causing a tax liability.
Another option is to take a loan from the policy. When you take a loan, the distribution is tax-free, but it does have to be paid back. If you don’t repay the loan, the outstanding balance will likely be deducted from the death benefit before your beneficiaries receive their share.
Financial Aid Benefits
The financial aid calculation is always challenging for families who have been saving for college. The more assets you have, the more your family is expected to contribute. That usually means a reduced financial aid package.
Life insurance isn’t included in financial aid analysis. That means you can use a life insurance policy as a college funding vehicle without it negatively impacting your ability to qualify for financial aid.
Ready to develop your college savings plan? Let’s talk about it. We welcome the opportunity to help you analyze your needs and goals and develop a strategy. Let’s connect soon.
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16115 – 2016/9/20
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