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Fund College With Life Insurance?

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Rising costs of college tuition are making it increasingly hard for some boomers to pay for their childrens college education. Among saving options available, some advisors believe that using the cash value built up in life insurance policies can be a good way to pay these expenses.

The policyholder has the option of using the cash value built up in the policy to pay tuition. Or, if the boomer wants to ultimately re-establish the policys death benefit, he can take out a loan up to the amount of accumulated savings.

Raymond D. Loewe, a college advisor with Financial Resources Network, Marlton, N.J., notes that using life insurance to save for college has advantages and disadvantages.

Loewe says a life insurance policy allows a client to deposit after-tax premium payments, which grow tax-deferred and can be withdrawn tax-free to use for college or other uses.

Income tax regulations allow nontaxable withdrawals from life insurance contracts up to the total amount of premiums deposited, says Loewe. These are treated as tax-free recovery of principal.

In addition, the policy owner may borrow excess cash value from the contract at a low net rate of 0% to 1% annually.

Loewe often recommends variable life as a saving vehicle for grandparents who are fairly wealthy and want to fund college for a grandchild.

“As long as you have at least eight to 10 years to build up cash value, it works well,” Loewe says.

“If the kid is going to school in the next three years, its not worth it,” agrees Bard Malovany, a financial planner with Financial Council Inc., Annandale, Va. There are better vehicles, such as section 529 savings plans or borrowing against the parents 401(k) plan, for funding college for most people, he says.

Byron Udell, founder and CEO of AccuQuote, Wheeling, Ill., says if a client does want to use a life policy as an accumulation/investment vehicle for college, he needs to overfund it.

“Otherwise, it doesnt generate enough cash,” he says. “The cash value will be gobbled up in fees, loans and everything else.”

He also emphasizes that the insurance must be on the parent or grandparent, not the child. “If the insurance is on the child, then if something happens to the parent, the funding for the policy ends.”

Robert J. Kuehl, a certified financial planner with H.C. Denison Co., Sheboygan, Wis., advises clients to use life insurance to pay for college only when they have an existing life insurance policy that is no longer needed.

“To me, it makes no sense at all to take out a policy just to pay for college,” Kuehl says. “You have the cost of insurance charges coming out of the premium payment.”

Its far better, he says, to put the full amount that would have been paid for insurance premiums into another kind of savings plan.

Kuehls advice on selling life insurance to boomer clients is simple.

“First, make sure they have enough life insurance to take care of their own scenario as a parent,” he says. “If they need insurance and the most affordable way for them to get it is term life, do that and look at ways to save for college, too. I think youre better off separating the clients needs and then taking care of each need.”

Life insurance just isnt the answer for most people in funding their childrens college education, another producer emphasizes.

“I think one of the most important things for consumers to keep in mind is that there is a big insurance commission behind the sale of the life insurance policy, and many agents are pushing this concept [of using life insurance to pay for college] for their own personal gain,” says Michael J. Horbal, president of, Newtown, Pa.

“The consumer needs to see accurate comparisons using an insurance policy vs. alternative investments. They need to be fully informed of all risks with either choice and make the decision that is right for them.”

Reproduced from National Underwriter Life & Health/Financial Services Edition, November 21, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.