As tuition prices continue to rise, families must plan to put away more money for their children’s and grandchildren’s future education needs. According to the College Board’s “Trends in College Pricing, 2015,”1 the 2013-2014 average total costs (including tuition, fees, room and board) was $18,391 for in-state students attending four-year public colleges and universities and $31,701 for out-of-state students. Students who attended four-year private colleges and universities incurred average costs of $40,917. Additionally, the cost to attend college increases at an average of around 5% to 8% per year.
The Growing Need for College Funds
These costs have created an unfavorable outlook for students looking to apply for college. Seventy-five percent of students get in to their first choice college, according to the Cooperative Institutional Research Program’s (CIRP) publication “American National Norms, Fall 2013.”2 Unfortunately, more and more students are not attending their first choice school in large part because of cost. In 2013, 57% of students chose not to attend their first choice school, according to CIRP. Among those students, 62% said they could not afford to attend it. Another survey, conducted by the Huffington Post in 20133, found that 62 percent of respondents believe most people are not able to afford the cost of a public college education.
Life Insurance to Grow College Funds
Life insurance is an essential piece of almost every family’s financial plan. It provides client’s peace of mind knowing that their families are protected in the event of an untimely death. But there are other methods by which families may utilize this product. The premiums paid toward an Indexed Universal Life insurance policy can serve two purposes. The same policy that protects loved ones may also build accumulation value that can be used for a variety of needs, including education funding. As tuition prices continue to rise, families must plan to put away more money for their children’s and grandchildren’s future education needs. Some fund this need using mutual funds, CDs, or 529 Education Savings Plans.
However, an IUL policy may be a viable dual-purpose alternative that:
- Provides Tax-Deferred Accumulation Value
- Protects money from risk Minimizes tax burden while building Accumulation Value
- Provides downside protection in bad economic conditions
- Allows control of the of the accumulation value and whether to take policy loans
- Is not a “countable asset” when child applies for college financial aid
- Allows access to tax-deferred accumulation value for education funding
- Guarantees a generally tax-free death benefit to ensure reaching education goals
Indexed Universal Life
As you may already know, an IUL policy is a type of permanent insurance. IUL policies mimic a specific stock index, such as the S&P 500, and provide returns based on market performance. Once the cash value has built up to a substantial level, the client can begin taking tax-free withdrawals/loans to supplement their education funding needs.
Those looking to purchase an IUL policy must note that only the premiums that are not used towards life insurance coverage are used to build tax-deferred cash value. And since an IUL is used for life insurance, as well as a cash accumulation tool, the owner’s age and overall health can have a huge impact on premium costs, which would ultimately hurt the accumulation. However, the added death benefit of the IUL, pays tax-free dollars to the designated beneficiaries should the owner die prematurely.
Although IULs can generate a considerable amount of cash value, this product must be well-funded by the owner making the maximum allowed premium payments. If the policy loans become too great, and the policy underperforms, the policy could ultimately lapse.
Allowing the policy to lapse can actually leave the policyholder with a large tax bill, so the owner should be advised that this is a long-term planning strategy with potentially significant penalties if the policy is surrendered or lapses. Ultimately, a person who wants to purchase this type of product should consider all their options and seek the advice of an independent financial or insurance professional to decide which method is right for their personal situation.