If you have a child, you may want to know about an unconventional and often underutilized way to help pay the tuition: your permanent life (whole life or universal life) insurance policy.
Life insurance is a contract between an insurer and a policy owner. A life insurance policy guarantees the insurer pays a sum of money to named beneficiaries when the insured dies in exchange for the premiums paid by the policyholder during their lifetime.
According to a 2020 report from trade research organization LIMRA, these are the most common reasons Americans said they bought life insurance:
- 84% Burial/final expenses
- 66% Wealth transfer
- 62% Income replacement
- 57% Supplement retirement income
- 50% Pay off mortgage
If you are among the 46% who don’t have Life Insurance, what is your reason for not getting it?
Different people have different insurance needs at different periods of their lives.
Below I will share brief details about the different types of Life Insurance and also Pros and Cons of using Life Insurance for college
Term Life Insurance – is popular for its lower premiums, but it usually will expire well before the end of a policyholder’s life.
Types of Term Life Insurance:
Decreasing Term – renewable tern with coverage decreasing over the life of the policy at a predetermined rate
Convertible Term – allows policyholders to convert a term policy to permanent insurance
Renewable Term – is a yearly renewable term life policy that provides a quote for the year the policy is purchase Premiums increase annually and is usually the least expensive term insurance in the beginning
Permanent Life Insurance – policies have the opportunity to build cash value, which can be accessed through policy loans or withdrawals for anything of your choice, such as college funding, retirement, etc.
Types of Permanent Life Insurance are:
Index Universal Life (IUL) insurance policies can help you to build wealth while leaving behind a death benefit for your loved ones The policies put a portion of the policyholder’s premium payments toward annual renewable term life insurance, with the remainder added to the cash value of the policy after fees are deducted.
The bottom line: IUL insurance can help you meet your family’s needs for financial protection while also building cash value.
Whole Life: From an investment perspective, whole life insurance is generally the safest kind of permanent life insurance. The issuer credits your account by a guaranteed amount, although it may pay more if the investments perform well. Most policyholders can expect a return of anywhere from 3% to 6% after the first several years. Meanwhile, the money in the cash-value account grows tax deferred, mush like 529 plan – but remember with policy you have the death benefit
Variable life insurance gives policy holders a degree of control over their investment. In this case, you select the sub-accounts-essentially mutual funds that you want to be attached to your policy, and your account’s annual return is pegged to the performance of these underlying investments.
The potential reward is greater, but there’s a risk that your balance could fall in a given year if the market takes a plunge.
For the above policies that have cash value, when it’s time for your child to start college, you can take out a loan against your cash balance. The insurer will reduce your death benefit if you don’t pay back the loan, but that’s not necessarily a drawback if you intend the policy primarily as a college savings plan all along.
Pros of using Life Insurance for College
Compared to 529 plan, Life insurance has a couple of benefits those include;
Flexibility – if the child’s decides against college, money is not restricted only to pay college
529 savings if used for any other expense other than college have a 10% plus tax penalty
Financial Aid – Life insurance is not included in financial aid calculations
529 plan is considered a parental asset, and up to 5.64% of parental assets are counted in the applicant’s expected family contributions for each year of college – it is a negative for the student, meaning they will get less funds because the EFC is high.
Simplicity: accessing their policy’s cash value is as simple as requesting a loan or withdrawal
Control: only your client can access their policy’s cash value and decide how their policy loans or withdrawals are used
Cons of using Life Insurance for College
Starting early is key – if starting late you will note that it takes longer for your cash value to surpass what you have paid in premiums, but if patient you will benefit at the end
The loan against your cash balance would need to be paid back if not the insurer will reduce the amount from your death benefit
A word to the wise: If the insured cannot pay the premiums and has accumulated enough cash value, the cash value can be used to pay the premiums to avoid the policy from being terminated or lapse.
- Wealthy people use insurance to build & transfer wealth, tax free
- Leverage insurance as business capital
- Use insurance for generational wealth
- Discover Tax Free retirement options
Life insurance policies can be more complex compared to other types of insurance, and they aren’t necessarily right for everyone.
Talking to an experienced life insurance agent “Like me” can help you decide the best fit for you.
When you take care of your life, it’s easy to protect your loved ones.
Let me help you find a Life Insurance Plan that fits your lifestyle.
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I will be glad to help you make an impact for generations to come.