Using Life Insurance for College Funding

It probably wouldn’t surprise you to learn that the cost of college tuition has gone up since back in the day when you got your degree. But how much college tuition has climbed may surprise you.

According to the College Board’s “Trends in College Pricing 2017” report, students at public four-year institutions paid an average of $3,190 in tuition for the 1987-1988 school year, with prices adjusted to reflect 2017 dollars.

Fast-forward 30 years and that average is $9,970 for the 2017-2018 school year. If you weren’t a math major, don’t worry, we have a calculator. That’s an eye-popping 213% increase. And that is not even taking into consideration the increased cost of room and board, not to mention everything else that causes the college cash register to keep ringing.

Every Option on the Table

It’s no surprise then that families looking to help their college-bound kids fund higher learning consider all tools at their disposal. Naturally, scholarships are at the top of any parents’ wish list.

According to a 2017 survey from Sallie Mae, close to half of students received some kind of scholarship in 2016. The report says that scholarships and grants, which do not have to be repaid, covered about 35% of the college bill for the average family.

And colleges and universities aren’t the only sources for scholarships. While 87% of students received their 2016 scholarship from their college, 75% cited private sponsors and community groups. Meanwhile, 65% said they received money from a state program.

In addition to scholarships, loans, income, and savings were the most common sources of college funding.

529 Plans Give Two Options

The best-known college savings vehicle is the 529 plan. Similar to how qualified retirement plans are treated, a 529 account is a tax-advantaged savings plan designed to encourage saving for future college costs, according to an introduction published online by the U.S. Securities and Exchange Commission.

Legally known as “qualified tuition plans,” they are authorized by Section 529 of the Internal Revenue Code. They are sponsored by states, state agencies or educational institutions.

There are two types of 529 plans: prepaid tuition plans and college savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a prepaid tuition plan. 

What About Cash Value Life Insurance?

Cash value or permanent life insurance policies may be mentioned in the mix as a strategy for college funding. With permanent life insurance, the cash value of a policy grows tax-deferred and, once it has grown, money can be taken on an income-tax-free basis from the cash value via policy loans.

Loans do have to be repaid with interest, but some insurance companies allow for outstanding loans to be covered by benefit proceeds upon the policyholder’s death. 

You don’t need to be related to the recipient when using cash value life insurance, as it gives you the flexibility to save for any person, business, or charity. More than one college-bound kid? You can choose multiple beneficiaries, dividing the proceeds at whatever percentage you select. College savings plans, by contrast, generally limit beneficiaries to family members and close friends.

Cash value life insurance may offer the feature of financial flexibility as the cash value may be accessed for other needs beyond college funding.

Another feature of this life insurance strategy? The formulas used for determining financial-aid needs do not include cash value life insurance.

It’s important to note that this may not offer much benefit to a high-income household with an EFC, or Expected Family Contribution, that is too high to qualify for need-based financial aid. An EFC is not the amount of money a family pays for college. It’s also not the amount of federal student aid that could be received. It’s a figure used by a college or university to calculate the amount of federal student aid a student is eligible to receive.

Who can Benefit from This Strategy?

How a cash value life insurance policy can be used is heavily dependent on a family’s complete financial picture. It should be evaluated on a case-by-case basis.

The younger you are when you buy a cash value life insurance policy, the more time it has to grow. From an actuarial perspective, it should cost you less because there is a lower probability of mortality. Those of older age may not be able to leverage the full benefit of a cash value life insurance policy than in their youngers years, though. This is due to the cash value not having as much time to grow. There is also a greater mortality risk to the insurance carrier covering the death benefit, which may increase the cost of insurance.

Any recommendation for college funding using cash value life insurance should take place on a best-interest-of-the-client standard basis, looking at the potential policyholder’s complete financial picture. Factors to go over include: 

• Age
• Spouse’s age
• Age of the college-bound children
• Household income
• How much other assets exist
• The values of those other assets
• Sources of policy funding
• Any potential tax effects and fiscal implications from the source of funding
• Other college funding options available

A complete, honest, objective analysis of a client’s financial picture is the first step to determining if college funding using cash value life insurance is an appropriate strategy.

Along with a full financial evaluation, consider opinions from other college funding and financial professionals. If other options are at your disposal and they are financially advantageous, it might be better to tap those options for paying for post-secondary education.

Need Help with Your Money Questions?

If you need help with getting on the right foot for your financial goals, financial professionals at SafeMoney.com can help you. They have helped many families and retirement investors to be better prepared to achieve their objectives.

Use our “Find a Financial Professional” section to locate someone and connect with them directly. Should you need a personal referral, call us at 877.476.9723.