This is how you can use life insurance products to help families fund college
Contrary to belief, college financial planning is not all 529 plans. Many 40 and 50-year-olds DO have money and will have more money as they age. Many are HENRYs (High Earners, Not Rich Yet).
You can sell annuities to clients with high school students who want to pay for college with grant and scholarship aid; and cash value life insurance to younger clients with elementary and middle school students who want to save for college, without wrapping themselves up in the 529 quagmires. Robo advisors can’t touch this kind of planning!
What kind of annuities and life insurance?
Well, that certainly depends on the client. You can’t sell cash value life insurance or annuities with high surrender charges to clients with high school children. The cost is simply too high. Even if you happen to get the client more financial aid by moving their money to these exempt products, the cost is usually way too high if the client needs the money in the near future to fund the tuition bill.
How about a no-load, or low-load annuity; such as an annuity with an opt-out feature after one year. Many advisors sell those. Sure, it’s only a 1% commission, but if the client gets a decent financial aid package then you may get that 1% fee for 4-5 years while the student attends college. More importantly, you get a client that may be willing to move all their investments with you once the college years are over. Solving the high cost of college allows advisors to develop steadfast relationships.
What about younger parents with elementary and middle school students who want to save for college, but have no idea how to start?
They get mailers about 529 plans, but once you start explaining the 529 rules and regulations and the money they can lose if they need to access the 529 before college their enthusiasm wanes. So what do you discuss?
Well, for younger clients, cash value life insurance could be a great option. Think about it. Even if a family has $500 a month in disposable income, they’re not going to put it all in a 529 plan. They may put in $100 a month, but not the entire $500 because they can’t take it out if they need it for an emergency, without creating a tax issue. But they can put the entire $500/month into cash value life insurance and access it whenever they want. On top of that most of these types of clients have a need for protection and having a death benefit with a savings feature, can make a lot of sense.
A young healthy family means low cost of the insurance so more of the money can fund the cash value. Younger children mean the cash value has more time to grow. In the meantime, if one or both breadwinners gets sick or dies, they are covered. If they need money for an emergency, the cash value can be accessed (and put back in) tax-free. Most of all life insurance is not susceptible to market declines at the worst possible time.
If you think about it, cash value life insurance (if structured properly to keep the cost at a minimum) can be an outstanding savings vehicle for anything, but really for college.
Let me give you an example.
Example "A" below is the same old, “buy term life insurance and invest the difference.” Let’s compare a young family with 2 young children that invest the traditional way, versus the same family using cash-value life insurance as their main savings vehicle.
Example "A": Traditional 401(k) & 529 Savings Plans
Here we have a 32-year-old mother and father earning $85,000 per year from their cleaning business they started 5 years ago. They have two children, ages 4 and 2. They have a 15-year mortgage, and they invest $500 a month in their company 401(k) plan. They purchase a $500,000, 20-year term insurance policy for $50.00 per month and save $418 per month in a 529 college savings plan until the kids head to college in 16 years. Their total financial savings, including college for the kids, come to a monthly payment of $968 ($500 + $50 + $418).
Twenty years later, both parents are now at age 52. Both children are grown, now 24 and 22, out of college and out of the house. College is paid for, the house is paid for, and they have no debts.
At age 65 they have around $700,000 in their 401(k) retirement fund.
However, this financial plan has no contingency for unforeseen drawbacks, such as catastrophic major medical events, disability, death, or long-term care. If they take out the standard 4% distribution to live on each year, that’s at best, $28,000 a year assuming the market stays level. Worse, is the entire $28,000 is taxable.
Example "B": Alternative Personal Retirement & College Savings Plans
This example features a multi-purpose IUL policy as the main savings vehicle. It contains living benefits, protecting the client’s assets and retirement from catastrophic major medical events.
The same 32-year-old family invests the entire $968 per month of income into an index universal life insurance policy. The initial death benefit is $525,000 and projected income growth is 6.1 percent annually. They have the same 15-year mortgage plan.
Twenty years later, both parents are now at age 52. Both children are grown, now 24 and 22, out of college and out of the house. College is paid for, the house is paid for, and they have no debts.
At age 65, they retire with an annual income of $70,718 from the IUL policy. Furthermore, the entire $70,718 is not taxable, so it’s basically 3 times as much cash as they would get with the traditional method, after taxes. The policy also includes a contingency plan for catastrophic major medical events, disability, and long-term care.
Using life insurance products to help families fund college can be helpful to parents and their kids and very lucrative for you.
Become a Certified College Funding Specialist today and learn more ways to help families in your community.