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February 27, 2013 at 04:39 AM
The cost of postsecondary education has soared in recent years and, much like health-related expenses, shows no sign of dropping anytime soon. Though your clients may be well aware of the many benefits associated with investing in life insurance policies, they may not be aware of the possibility of using life insurance as a college savings tool.
Parents looking for ways to fund their children’s college expenses have often looked to 529 savings plans or Coverdell education savings plan and, while these accounts can be beneficial, use of life insurance as a savings alternative may provide benefits that are impossible to realize through traditional savings vehicles.
Life Insurance as College Savings: The Basics
Clients have long looked to life insurance policies as tax-preferred investment vehicles because many whole life-type policies allow the client to take tax-free loans against the cash value of the policy.
The client can purchase a whole policy today and use the built-up cash value that the policy will accumulate over the years to fund college expenses at a later date. The withdrawal against the cash value in the policy is taken tax-free and the client can use those funds to finance any expense he chooses—even living expenses that may not be eligible for tax-preferred treatment under a traditional education savings plan.
Of course, the longer the cash value in the policy is permitted to accumulate, the larger it will become, so this type of savings vehicle is usually best for clients who have several years until their children will begin college.
Life Insurance or 529 Plan?
A life insurance policy that is used as a savings plan for college education expenses obviously maintains the tax benefits that it would otherwise carry, but also has an added perk: life insurance is not counted along with the client’s other assets in determining financial need. Excluding the value of the life insurance savings account from the calculation of a client’s ability to pay can allow the student to tap into financial aid sources that would otherwise be unavailable, thus reducing the cost of college for the client.
