Here, for Life Insurance Awareness Month, is an article about a use of life insurance that some financial professionals may not have thought much about.

In a previous article for ThinkAdvisor, we explored the benefits of permanent life insurance and the value of adding protection to your client’s portfolio. With the bull market continuing to roar, it’s important to keep in mind the responsibility you have to ensure your clients are aware of all potential options to help them both protect and grow their retirement assets.

Awareness about these options is a significant issue, as identified in the 2018 Life Insurance Needs Survey from Allianz Life Insurance Company of North America, which was conducted in January. The survey team brought in responses from 803 respondents age 35 through 60, with an annual household income of $100,000 or more.

(Related: Help Millennials Understand, and Use, the New Life Options)

Although nearly nine in 10 people (88%) understand the death benefit component of permanent life insurance, more than half (51%) said they are unsure or don’t believe cash value from permanent life insurance can be used to assist with other financial needs.

Among these additional financial needs is college funding. It’s no secret that college costs are on the rise. Students are paying an average cost of over $20,000 per year for tuition and room and board to attend a public four-year in-state college or university – and the average cost of attending a four-year private institution is more than $45,000 per year, according to October 2016 data from the College Board.

Thus, lack of awareness about available college funding strategies is noteworthy as nearly 70% of respondents to the Life Insurance Needs survey said they believe the ability to use the funds to pay for college is a valuable feature to consider when purchasing a financial product.

Even when 529 plans, Coverdell Education Accounts and other college funding options are available, many people still find a gap between the available funds and cost of college. So how can you help your clients fill that gap and gain a better understanding of how permanent life insurance can supplement their college funding strategy? These 5 questions can get the conversation started:

1. How can cash value life insurance be used to help fund college? First and foremost, clients should understand that the main reason for buying life insurance is to provide a death benefit for their loved ones in order to replace income or cover final expenses. However, with permanent life insurance — including fixed index universal life (FIUL) insurance — their policy has the opportunity to build cash value, which can be accessed through policy loans or withdrawals for anything they choose, such as college funding. Taking policy loans and withdrawals is dependent on the policy earning sufficient interest to support the strategy.

Of course, whenever a client considers using FIUL as a funding vehicle, the client must understand how FIUL works and get the appropriate disclosures.

Here’s an example of how we might word the disclosures: “Policy loans and withdrawals will reduce the available cash value and death benefit and may cause the policy to lapse, or affect guarantees against lapse. Withdrawals in excess of premiums paid will be subject to ordinary income tax. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. If a policy is a modified endowment contract (MEC), policy loans and withdrawals will be taxable as ordinary income to the extent there are earnings in the policy. If any of these features are exercised prior to age 59 ½ on a MEC, a 10% federal additional tax may be imposed. Tax laws are subject to change, and the client should consult a tax professional.”

2. What are the benefits to using loans from my life insurance policy as part of a college funding strategy? There are several benefits from utilizing loans from a life insurance policy, including: tax advantages (the death benefit is generally income-tax-free when passed on to beneficiaries), tax-deferred accumulation, and income-tax free loans); flexibility (your client can access their policy’s cash value for whatever they want and for any purpose they choose); eligibility (the money received through policy loans generally won’t affect the student’s eligibility for other financial aid); simplicity (accessing their policy’s cash value is as simple as requesting a loan or withdrawal); and control (only your client can access their policy’s cash value and decide how their policy loans or withdrawals are used). If the policy is fully surrendered, surrender charges may apply. For partial surrenders (withdrawals), partial surrender charges may also apply.

Here, too, there’s more to the story. With respect to eligibility for financial aid, for example, there are a number of important disclaimers to provide for your clients. Withdrawals from the cash value do generally count as income when families are applying for other types of financial aid. Clients need to contact the university or college for further information regarding eligibility requirements, as they may vary by school. But, after clients talk about these considerations with their tax professionals and the student’s school, they often find out that using a life insurance policy in a college funding strategy can work well.

3. I have a 529 plan for my child currently. What is the advantage to supplementing the 529 plan with permanent life insurance? The chief advantage of using permanent life insurance to supplement a 529 plan is the cash value in a permanent life insurance policy does not count as an available asset. This means it is not included in calculations to determine any financial aid. Additionally, there are no gift tax consequences when the insured parent owns the policy.

4. What if my child doesn’t end up going to college? Any available cash value from a permanent life insurance policy can be used to supplement the cost of paying for college, but it can also be used for other financial needs, providing flexibility if your child doesn’t go to college. Funds from 529 plans must be used for qualified education expenses — otherwise the earnings portion from nonqualified withdrawals is included in the beneficiary’s income and is subject to a 10% additional tax.

5. How can grandparents help? Using life insurance to help fund a grandchild’s college education offers many advantages. There are no complex eligibility requirements, no qualified education costs, and no income limits to consider. Plus, money received through policy loans or withdrawals generally won’t affect a grandchild’s eligibility for financial aid.

When having a discussion about utilizing permanent life insurance to supplement college funding, it’s important to remember that policy loans and withdrawals will reduce the available cash value and death benefit and may cause unintended consequences, including lapse or taxable events. It is important that your clients manage policy values to ensure the policy remains inforce and death benefit needs are being met. Keep in mind, life insurance requires health and financial underwriting.

If you determine permanent life insurance is appropriate for your client’s specific financial situation, it can be an effective tool to assist with their overall financial needs, including their college funding strategy. By being proactive and starting the conversation, you can demonstrate a deeper understanding of your client’s challenges and the variety of potential solutions.

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Jason Wellmann

Jason Wellmann is senior vice president of life insurance sales at Allianz Life Insurance Company of North America.