Life insurance ownership is at a 50-year low, with only 44 percent of U.S. households owning individual life insurance, according to a report released by LIMRA during Life Insurance Awareness Month. Furthermore, among households with children younger than 18, a segment with arguably the greatest need for life insurance, 11 million have no coverage at all.
This lack of coverage, especially for younger families, is alarming. It stands to reason that the birth of a child would be a primary time for young couples to start thinking about their financial future, but it’s important to consider that they may be in a difficult financial situation during that period. Not only do they have to think about protecting their new child’s future, they also have to figure out how to save for that child’s education and save for their own retirement.
It can be challenging for agents to work life insurance into this equation for younger clients, but discussing some of these goals together can actually be an effective way to explain the benefits of life insurance ownership. After all, it’s not mutually exclusive to fund a child’s financial future via life insurance and look for ways to potentially fund a college education.
Life insurance could be effective in a younger family’s overall financial strategy for several reasons. Life insurance will provide the financial reassurance they need, should the unexpected occur. The death benefit proceeds can be used to pay for final expenses, provide replacement income, or pay other financial obligations. Some policies also have the potential to build cash value. The policyholder can access cash value down the road (via policy loans), which can be used for various purposes, such as supplementing college funding.
The rise of the 529 plan
These days, when people discuss college savings, they generally focus on only one thing: 529 plans. Indeed, people are getting the message about 529 plans, as assets in these plans grew 1.3 percent between January and June 2010, and now total more than $135 billion. They are also gaining headlines by providing more options and reduced fees. Several 529 plan providers are introducing new products, added features, and reduced costs to entice investors seeking more conservative funding options.
All of this means it may be a good time to discuss college funding with young families, and how a life insurance policy can be part of that solution.
College funding has actually been an important consideration for many people who have purchased life insurance. According to the 2010 U.S. Life Ownership Study from LIMRA, college funding is among the top nine reasons for owning life insurance (10 percent) – although it ranked sixth on the list, behind reasons such as final expenses (78 percent) and income replacement (53 percent) – reinforcing the primary reason for owning life insurance with a death benefit. However, another LIMRA report – The Financial Protection of Generations X and Y – notes that, among younger families with children under 18, one of their most important financial goals is saving for their children’s education.
This seems to suggest a disconnect, or at the very least, a lack of understanding about some of the additional benefits that life insurance can provide. Although 529 plans are commanding the lion’s share of attention when it comes to college savings, a brief discussion about the options and flexibility of today’s life insurance policies can demonstrate their value as an alternative to 529.
How can life insurance help young families?
Life insurance can address some additional concerns – namely, what happens to those college aspirations if the primary wage earner dies? According to LIMRA, among households with children under 18, four in 10 say they would immediately have trouble meeting everyday living expenses if a primary wage-earner died today, to say nothing of paying for college.
The death benefit of a permanent life insurance policy can help address those critical needs – life insurers paid out nearly $59 billion in death benefits in 2009. When the a permanent life insurance policy has accumulated cash value, the policy holder can borrow or withdraw money as a source to help pay college expenses. In fact, owners of permanent life insurance may be able to borrow between 75 and 90 percent of the policy’s cash value, and the loan may not be taxable as long as the policy remains in force.
This can be a valuable tool for younger families looking to protect their children in the case of a tragedy, but also looking for additional ways to plan for college. With such policy designs as fixed indexed universal life (FIUL), the policy can earn interest based on the positive changes in an external index, such as the S&P, to help build cash value. If the index goes down, the policy won’t earn any indexed interest, but the cash value won’t go down, either.
And there are even more benefits of using the cash value in life insurance to supplement college funding. Currently, it’s not required to report life insurance policies under the federal FAFSA program, and they won’t be accounted for if the child needs additional financial aid through that program. In addition, if the child obtains a full scholarship or decides not to go to college, the insured can still use any available cash value for various purposes, such supplementing their retirement income.
Of course, it’s important to tell clients additional factors to consider when using a policy’s cash vale to help pay for college. Since life insurance is an underwritten product, it’s contingent on the health underwriting of the insured. Also, there are fees and expenses not present in other vehicles that may be used for college funding and there is the risk of a policy lapse if premiums are not paid.
As you can see, 529 plans are clearly here to stay and provide an effective method to save for college. But for younger clients who are currently using one, a 529 doesn’t have to be the only means to achieving that goal. Whether or not they plan to incorporate a 529, using the topic to discuss potential options for supplemental college funding can be an effective way to introduce the benefits of multiple strategies and the important role that life insurance can play.
Jason Wellmann is senior vice president of life insurance sales for Allianz Life.