SINGLE PREMIUM LIFE INSURANCE CAN HELP FAMILIES CUT COLLEGE TUITION, AVOID STUDENT LOANS  AND SAVE THEIR RETIREMENT

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Every year, students and their parents spend countless hours going through the stressful college admissions process in the hope of getting into top colleges. The results are often not pretty. As we just passed the May 1st enrollment deadline, here are a few comments of parents from a college Facebook group:

"My kid is in her room crying her eyes out because we can't afford the two favorite options we have and she is likely going to "have to go to a STUPID SUNY!".

"All our life we have saved diligently for retirement, and now I’m finding out that if I send my kid to a decent college, I’ll have to cash in my 401k or go into hellacious debt."

"These financial aid applications are tough to understand. My CPA said he’d try to help, but he has no idea how to qualify for money from the colleges. Where can I go to get help?"

Each year there is a new batch of parents and students that go through the same agony, but the truth is, in today's economy, getting into college isn't the problem.  

The real questions are:

  • How will you pay for it once you get in college?

  • How can you be sure you will graduate in only four years?

  • How can you be sure you will get a job in your desired field?

College is an expensive investment, and families need to treat it that way.  While parents across the country continue to pay for college without a game plan, you could become a financial hero to families by helping them avoid costly mistakes and putting the student in the right college for the lowest possible cost.

The cost of college today has risen to the point that many families cannot afford a top-notch college.

Cost of College (per child)

Public

Private

Late Stage Planning  (9th - 11th grade)

$30,000 yr

$70,000 yr

On Time Planning (6th - 8th grade)

$35,000 yr

$82,500 yr

Early Stage Planning (<6th grade)

$40,000 yr

$95,000 yr

$30,000 a year. That’s a MINIMUM out-of-pocket cost of $2,500 per month for each student. Most families are not prepared to add that additional expense to their monthly budget?

However, many families decide to fund college at the expense of their retirement. This decision can lead to disastrous retirement consequences. Let’s take a look at the college cost effect on retirement for parents with just one child graduating from college.

Cost Effect To Graduate From College
(per student @5% for 20 years (age 46 to 65))

 

Public College
(4 Years)

Effect on
Retirement

Private College
(4 Years)

Effect on
Retirement

Late stage (grade 9-11)

$120,000

$318,400

$280,000

$743,000

On Time (grade 6-8)

$140,000

$371,500

$330,000

$875,500

Early stage (<6th grade)

$160,000

$424,500

$380,000

$1,008,200

As you can see, the money you can lose for retirement ($318,400) to educate one child at a public college today ($120,000)  is considerable. Let’s look at these numbers a different way. The least expensive cost to educate one college student per year in today’s dollars is $30,000.

$30,000 x 4 years = $120,000

$120,000 x 20 years (age 46 to 65) @5% interest =$318,400

$318,400 @5% interest over the next 20 years (age 66 to age 85)= about $24,000

In other words, that $120,000 families spend on college to educate one child would yield about $24,000 a year in additional retirement income over 20 years (age 66-85). If the family needs to educate two children, the numbers double.

HOW TO DEVELOP A COLLEGE/RETIREMENT STRATEGY USING SINGLE PREMIUM LIFE INSURANCE

College financial aid is computed using the parents’ and student’s income and assets recorded on the FAFSA and CSS Profile financial aid applications. Parent income is assessed at 47% and student income at 50%. Parent assets are assessed at 5.64% and student assets at 20%. Therefore, every $100,000 of investments or savings in the parents’ name is assessed about $5,600 toward the family’s EFC. And every $100,000 of savings or trust in the student’s name is assessed $20,000 toward the family’s EFC.

However, two assets are EXEMPT and not assessed on either the FAFSA or the CSS Profile financial aid applications: retirement assets and life insurance. If a college-bound family has significant money sitting in savings or investment accounts, moving those assets to life insurance could dramatically increase their financial aid for college.

And why not move that money to qualify for aid? They may end up spending that money for college anyway! Without professional guidance, most families use one of the following methods to pay for college - without fail:

  • Cash in their stocks/mutual funds
  • Cash in or borrow from their 401k
  • Borrow against their home
  • Borrow from other family members
  • Sell other property/real estate
  • Use expensive private or PLUS loans

Planning for college costs the wrong way can indeed be expensive. However, many  CCFS® professionals use a special single premium life insurance policy to solve the college/retirement cash flow issue. Here’s an example case:

USING LIFE INSURANCE TO PAY FOR COLLEGE & RETIREMENT AT THE SAME TIME

The following example demonstrates how specially designed, single premium life insurance can be used to exempt your assets from being counted when filing your FAFSA and CSS Profile financial aid applications. Then once the student has completed college and is finished receiving financial aid, the money (cash value) from that policy can be moved to a max-funded life insurance policy that is specially designed to recapture all the money the client spends on college in IRS tax savings. Here’s how it works:

EXAMPLE:

A 46-year-old parent has a student applying to a private college with a cost of attendance of $49,000. The parents had $300,000 in bank CD’s and decided to move the money into a specially designed, single premium cash value life insurance policy (COLLEGE POLICY), thereby exempting that asset from being counted in the financial aid formula. As a result, the student received considerable financial aid, and the family ends up paying about $125,000  (COLLEGE WITHDRAWAL) for four years of college.

At age 49, after the student’s last financial aid package, the parent moves the balance of the account ($200,000) in five installments into a regular cash value life insurance policy (RETIREMENT POLICY) to create additional tax-free retirement income. No further premiums are made after those five installments.

At age 65, the parents can now begin to withdraw tax-free income (RETIREMENT WITHDRAWAL) of $40,708 a year until age 85. They also have a death benefit (DB) of around $650,000.

COLLEGE FUNDING POLICY

 

RETIREMENT FUNDING POLICY

AGE

PREMIUM

WITHDRAWAL COLLEGE

WITHDRAWAL RETIREMENT POLICY

 

AGE

PREMIUM

RETIREMENT PAYOUT

DEATH BENEFIT

RATE OF RETURN %

46

$300,000

$25,000

   

46

       

47

 

$25,000

   

47

   

$650,000

 

48

 

$35,000

   

48

       

49

 

$40,000

$40,000

 

49

$40,000

     

50

   

$40,000

 

50

$40,000

     

51

   

$40,000

 

51

$40,000

     

52

   

$40,000

 

52

$40,000

     

53

   

$40,000

 

53

$40,000

     

54

Original

$125,000

$200,000

 

54

       

65

       

65

Final Result

$407,708

$451,000

5.31%

What other financial product could help your clients qualify for financial aid, pay for college and retirement at the same time, plus adequately protect their family from financial hardship upon the untimely death of a breadwinner?

Are your clients concerned about the amount of money it will take to educate their children and the effect it will have on their retirement? Then you may want to contact them to discuss this college/retirement life insurance strategy.

Posted by Ron Them

For over 20 years, the nation's leading financial advisors, broker/dealers, and major media outlets have been using his research, funding strategies, training, and insight. Ron is highly regarded as an expert in the college funding field.

He is a former Chief Financial Officer of a Fortune 500 company and currently owns his own financial advisory company specializing in cash flow planning for business owners and executives. He developed the Cash Flow Recovery™ process that uses cash flow management principals to increase asset value and build wealth for business owners.

He is also the originator of several software calculators to help advisors and families make college affordable, including:

* College QuikPlan EFC Calculator
* "Find the Money" College Cash Flow Calculator
* College Debt Reduction Calculator

Ron has been quoted in U.S. News and World Report, Kiplinger's Personal Finance, Smart Money, Financial Advisor Magazine, Small Firm Profit Report, Practical Accountant, LIMRA's Market Facts, Senior Advisors Magazine, HR Magazine, BenefitNews.com, Employee Benefit News Magazine, ProducersWeb.com, Entrepreneur Magazine, Insurance Selling Magazine, CollegeNews.com, The Christian Voice, and Columbus CEO Magazine.