In today’s technology-driven world, to earn a job at the upper end of the growing service sector will require young people to obtain an education beyond high school. While higher education is a great investment for parents, it’s becoming prohibitively expensive. Over the last two decades, college costs increased an average of 8 percent a year. Given the magnitude of future college expenses, many couples with children younger than 5 may need to save between $200 and $500 a month to accumulate enough money to fund their child’s higher education.
Those with older children and a shorter accumulation window, however, will have to save more. Because of their unique tax-shelter-ing characteristics, those funds could go into fixed, indexed, or variable life insurance and deferred annuities. Sales of this size are well worth the efforts of most agents.
Adjusting spending priorities
Young families often wonder how they can manage to accumulate the necessary funds. Setting money aside requires extraordinary discipline, especially when there are strong demands on available money for nice homes in safe neighborhoods, furnishings, cars, and expensive activities for their children.
Before your prospects will set aside money to defray future college expenses, they must have the desire to save additional money, have the discipline to adjust their lifestyles, and have a clear-cut set of objectives.
If sufficiently motivated, most people can adjust spending in one budget area to accomplish savings in another. When reviewing your prospects’ current budget to “find the money,” try to discover whether better money management will achieve monthly savings, any debts that are about to be paid off, and whether debt consolidation is worthwhile.
To assist your prospects in setting clear-cut college funding objectives, review with them the four planning steps below.
1. Define costs parents will assume. Most parents put a priority on preparing their children for successful adulthoods. However, philosophies differ on how much parents should pay for their children’s higher education. For example, a parent who worked to pay part or all of their own expenses may want a child to benefit from a similar experi-ence. Others whose parents paid for their entire education may feel it is their duty to do likewise. Either is fine. Your role is to help prospects set positive plans in motion.
Key interview questions:
- What total dollar amount do you feel you’d be able to accumulate?
- What methods do you believe will best accomplish your college education fund goal?
- Why do you say that?
2. Determine the annual college payout. When more than one child is involved, parents must understand overlap if they will have more than one child in college at the same time.
Key interview questions:
- Given an overlap in expenses due to your children’s ages, shouldn’t we examine financial vehicles that will allow you to access your savings funds without a hassle when needed?
- Do you wish to set up separate accounts for each child or accumulate one large pot of money?
- Why do you feel that way?
3. Put emphasis on how to afford rather than where to go. Most parents feel their children will easily qualify for Harvard or Stanford. Unfortunately, few get chosen to attend these prestigious Ivy League institutions. Unless there are only a few years to go, focus your prospects’ attention on how they’ll be able to afford for their children to go to college in general rather than a specific university.
Key interview questions:
- At this stage, shouldn’t we focus on how you can afford for your children to attend a college in general rather than focus on a particular school?
- What type of school would you prefer they attend (private, state university system, or church affiliated)?
- How far away from home is too far?
4. Calculate a monthly savings objective. Before your prospects can establish a reasonable savings goal, they must fully understand what a higher education might cost. To help them make that determination, have your prospects complete the “Estimating the Cost of Funding College or Higher Education”worksheetby themselves, with you serving only as a coach.In doing the calculations themselves, parents will receive a wake-up call. (.)
Now that you’ve helped your clients outline their specific financial needs, it’s time to help them match up their problems with solutions. Point out the advantages inherent in tax-deferred accumulation and the equivalent interest rate the prospects would have to earn in a currently taxed vehicle. Suggest that your prospects look carefully at the flexibility and benefits of permanent cash value life insurance. (The life insurance should always insure the parents’ lives, not the children’s.) And point out that life insurance is uniquely qualified to meet the three contingencies that could disrupt or derail their college fund accumulation plans: death, disability, or the inability to keep the funds saved.
While policy values over a short accumulation time window won’t represent much of a “return,” over the long haul a combination of life insurance and annuities accomplish the job of accumulating the funds and keeping them intact.
Many children will soon be entering institutions of higher education, leaving their parents facing the cost of funding this education in addition to trying to meet myriad other financial needs. With a little guidance, however, your clients can benefit from the solutions you present to help them meet this additional goal.
Larry L. Cox is president of Cox Insurance Marketing Solutions. He can be reached at firstname.lastname@example.org.