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August 24, 2003 at 08:00 PM
The VUL Option For College Funding Might Be Right For Your Clients
As a father of a six-year-old girl and a three-year-old boy, college seems like some far away event, and is consequently low on the priority scale. Right now, Im focused on ballet lessons, soccer games, Barbie and matchbox cars. But the reality is that I have only 12 and 15 years, respectively, to save for that magical day–that I still remember so well–when my children move into their freshman dorms. Many of your clients find themselves in the same situation.
Even in todays dollars, the cost of a four-year college education is frightening. According to the College Board, this years average cost for students enrolled in private colleges and universities, including tuition, fees, room and board, books, travel, and incidental expenses equals $27,677. So, by the time my daughter enters college in 2015, the cost of a year at “Private U” (assuming a 6% annual increase) will set me back a mere $55,691. If I adjust for the next three years after matriculation, the bill for four years will be $243,629.
Furthermore, recent reports state that many public universities are raising tuition by 20% to 40% (for a second straight year) this fall.
The Latest and Greatest: 529 Plans. The 2001 tax act significantly enhanced the appeal of Section 529 qualified tuition programs. Notably, distributions made from the state maintained qualified tuition programs to pay for qualified higher education expenses are excludable from gross income. Likewise, distributions made beginning on or after Jan. 1, 2004, are excluded from gross income for qualified tuition programs established and maintained by an entity other than a state.
A contribution to a qualified tuition program qualifies for the $11,000 annual gift tax exclusion as well as an election to spread the gift ratably over five years. Therefore, a married couple can contribute up to $110,000 ($55,000 for a single person) in a single year on behalf of an individual and still avoid gift taxes.
Additionally, it is now easier for grandparents to fund their grandchildrens education since they are able to change beneficiaries among their grandchildren without restriction.
The Variable Universal Life Option. Variable universal life has long been touted as a tool with so much flexibility it can solve many problems. One of the problems this product can be used to address is that of college funding.
First, this caveat: Due to fees, expenses and the fact that values may fluctuate, the VUL policy is inappropriate for college funding if the time horizon is less than 10 years. For those clients with a shorter time horizon, 529 plans and/or other investments are more appropriate.
But for clients with young children or grandchildren, VUL offers numerous advantages. First and foremost, life insurance carries a death benefit. If the insured is someone that can be used other than the student, the death benefit may provide an immediate funding mechanism to help pay for education costs. The policy proceeds, of course, escape taxation entirely when they are delivered as a death benefit. This death benefit is received by the policy beneficiary and is excluded from the beneficiarys income.
